Some Smart Hedge Funds like AAPL

REFERENCE: http://seekingalpha.com/article/1931061-Hedge-Fund-Picking-Means-Apple-Season?source=email_

BY: Hedgemony. www.hedgemony.us   A social research tool to discover where hedge funds and other investment managers are finding investment opportunities today. Join now to find out where to put your money to work like the experts do!

We all know Apple (AAPL) has had a tremendous decade of growth, but just to explicitly remind you how astronomical it has been, below is the table of Apple’s yearly performance. The stock has been up nearly every year by sensational amounts, and even though 2013 was a rocky year, it still managed to put forward a positive post.

Date Price Change % Change
12/31/2013 561.02 28.847 5.42
12/31/2012 532.173 127.173 31.4
12/30/2011 405 82.44 25.56
12/31/2010 322.56 111.828 53.07
12/31/2009 210.732 125.382 146.9
12/31/2008 85.35 -112.73 -56.91
12/31/2007 198.08 113.24 133.47
12/29/2006 84.84 12.95 18.01
12/30/2005 71.89 39.69 123.26
12/31/2004 32.2 21.515 201.36
12/31/2003 10.685 3.52 49.13

What is more interesting about the quality of Apple’s return, however, is that the correlation to the broader market is at an all-time low. I graphed the 120-day daily rolling correlation to the SPX index, and it is at a decade low of 12% (having peaked as high as 80% from 2008-2011).

(click to enlarge)This signals that Apple is becoming a source of diversification to the broader market, believe it or not, and may even be a source of true alpha generation going into 2014 after a lackluster 2013 with what many agree has resulted in cheap valuations at 12x PE (when the SPX index itself is at 17.5x today). Out of curiosity, I looked into who the smart money institutional owners of Apple are, and I was surprised to find an eclectic collection of well-respected hedge fund managers that are each known for their unique and proven investment strategies.

Top 5 Hedge Fund Holders Explained

If you look through the Top Holders of Apple on Hedgemony (www.hedgemony.us), you can observe that there is an array of institutions – from banks to sovereign wealth funds. I sorted the list by “percent of Portfolio” which is what I think remains the best proven metric of the investment thesis conviction. While percent of shares outstanding is important to gauge size in market, a portfolio manager’s conviction is only reflected by sizing within his fund assets. Of the 100 fund holders that have sized Apple to be 4.5% or greater, I share with you the top five hedge funds that remain relevant players today. I will provide you a brief biography so that you understand their pedigree and investing philosophy, which may perhaps even motivate you to peak into what other stocks they own so that you can gather new intelligence if their investing philosophy is in line with yours.

Shares % of Portfolio
Greenlight 2,397,706 20.29%
Andor 350,000 12.40%
Valiant Capital 258,431 10.57%
Empire Capital Management 180,000 9.89%
Nokota 425,000 8.84%

1) Greenlight – Long term value + activism

David Einhorn really needs no introduction to anyone who follows the hedge fund industry. A Cornell graduate, Mr Einhorn has demonstrated success not only in long positions but also in shorts through some various highly publicized inquiries (there was Green Mountain (GMCR), Chipotle (CMG), and even Herbalife (HLF) at one point before the infamous you-know-who got involved). He has returned ~20% annually for almost two decades, with a beta less than half and now currently runs close to $5 billion. His investing philosophy tends to be very long-term oriented so his portfolio does not turn every quickly. In fact, comparing quarter to quarter on his 30 stocks according to the 13Fs, only three are new initiations in Q3 2013, and of the remaining 27, 16 of them didn’t even change in sizing. That’s value investing. And guess how much Apple Greenlight owns? A whopping 20.3%. In fact, it’s his largest position in the portfolio and if there’s any career investor you can trust who did his homework, it’s Mr. Einhorn. Regarding his activism, he has advocated for an efficient reorganization of the capital structure; a similar theme was more recently repeated by Carl Icahn himself. While suing Apple initially was probably not the friendliest of actions, he remains level-headed in the pursuit of several share buyback arrangements that have been received positively by Tim Cook. 2014 may be the year that everyone waited for the release of Apple’s cash to determined investors. Fun fact: he is also related to Sheryl Sandberg as cousins, for what it is worth.

2) Andor – Technology guru + concentrated risk

Andor Capital is run by a guy named Dan Benton, ex Pequot. It is a technology specific hedge fund with reported assets north of $1bn of which a significant chunk were from investment gains itself. The firm suffered horrible losses in 2008 during the financial crisis and was temporarily shut down, so risk management is not the strongest suit. The firm employs a traditional long short strategy, but is known for taking very concentrated positions (15-25 names), with the top 5 names to account for over half the risk during various cycles – potentially the reason why the firm faced such difficulty in 2008. His most notable longs in 2013 were Google (GOOG), Cirrus Logic (CRUS), Mellanox (MLNX), eBay (EBAY), among others. Today, his top position remains Facebook (FB), but Apple is a close 2nd.

3) Valiant Capital – International markets focus + Tiger grandcub

Valiant Capital is a $2.5bn long short fund managed by Chris Hansen, a member of the Tiger family. It was founded in 2008, and Chris was formerly an MD at Blue Ridge Capital for over five years. His performance unfortunately in 2013 was lousy – most likely due to shorts, and his past performances has been mediocre as well. Also important to note is that he invests internationally (60%+ of his longs are non-US) – and emerging markets generally has had a tough environment, especially India and Brazil. Regardless, Mr Hansen is a stubborn investor who sticks to what he knows and likes best – and he likes value and shorts frothy fraud-like names of utmost exuberance. This didn’t work in 2013 with the social media frenzy and general appetite for multiple expansion, but his pedigree and value-oriented picks should give comfort to why Apple remains a strong buy from a macro angle beyond the US stock market.

4) Empire Capital – Longevity

Empire Capital is arguably the least known fund on this list – and that’s perhaps because the fund is a lot older than others (which is a good sign and the reason for my inclusion of conviction). It is run by Scott Fine and Peter Richards, and is one of the oldest technology hedge funds in existence, having launched in 1996. Apple remains their 2nd largest position. The conviction I get from Empire Capital being on the list is that they are one of the few tech funds to have experienced the tech bubble and then survive to rise. My guess is that they are careful in their longs being fundamentally sound and not momentum driven, as a survival period of ten-plus years in the tech investing space is a testament to its own success. There are not even many technology firms themselves that last that long.

5) Nokota – Event Driven + Tactical

Nokota, saved for last, is nonetheless a compelling addition to the roster. Nokota, founded in 2011, is run by two guys named Matt Knauer and Mina Faltas. What is truly outstanding about this firm is that both PMs come from two of the most successful hedge funds ever – Appaloosa Management and Viking Global Investors. In fact, David Tepper helped seed Nokota, which is a strong signal of conviction for his fellow analyst. Nokota tends to traffic in event-driven names and situations, where a tactical component is maintained to dynamically mange the risk from a top-down level in addition to being fundamentally driven. It combines the best practices of both worlds thanks to the PM’s complementing experiences. They own Apple through options, which is an interesting implementation that signals that there may potentially be the necessary event in the short-term to capture outsized volatility in the right direction. Nokota also tends to own relatively unknown names, so seeing a brand name like Apple on the list makes me believe that it is compelling beyond general expectations.

Conclusion

What I have tried to highlight is that of the five hedge fund holders on the list that are each known for different expertise, Apple remains an outsized top position for all in unison. Be it fundamentally value driven with an activist component, or a tactical overlay to an event-driven strategy, by sector generalists or technology gurus, from 1996 launches to 2011 newly minted managers, it really is the most solidly diverse source of conviction that anyone can ask for. It is when such consensus among varied investors is reached that an average investor can gain conviction in joining the camp. Sometimes, it is just as simple as that – you win by following the smart money ahead of you.

What Apple Should Buy

A good summary.  55 Billion shopping spree.

After spending the better part of yesterday digging deeply into Samsung’s (OTC:SSNLF) analyst day materials, it has become clear to me that Apple (AAPL), over the long haul, stands very little chance against the Samsung behemoth. While Apple’s products truly are wonderful, and while its engineering prowess is certainly very impressive, it’s clear that Samsung will brute-force its way into taking more and more marketshare from Apple at the high end while at the same time will enjoy key structural advantages in the low end that Apple would – at least in its present form – not be able to match.

Apple needs to start getting much more aggressive if it is to survive and thrive against the Samsung assault and it needs to move quickly.

Samsing Owns Nearly The Entire Smartphone/Tablet Bill Of Materials

Samsung builds the following:

  • DRAM
  • NAND
  • Displays
  • Apps processors (it even builds them for Apple)
  • Cameras

On the other hand, Apple relies on third parties for just about every one of these. In fact, while Apple has been attempting to move away from dependence on Samsung for many of these components, it has been one of the key enablers of Samsung’s semiconductor manufacturing strength. When you’re building the apps porcessors (as well as potentially modems) for every iPhone and iPad, then that’s going to help drive reinvestment.

Samsung, of course, leverages this great cost structure to not only flood the very high growth low end market with smartphones, but it also pushes the envelope at the high end at prices that match (or even undercut) what Apple provides. Let me show you an example.

Galaxy Note III versus iPhone 5S – An Example

The most obvious comparison is the Galaxy Note III versus the iPhone 5S. For $299 with a contract, Samsung sells users the following:

  • 5.7″ 1920×1080 display
  • 3GB of RAM
  • Either Snapdragon 800 or Exynos 5 Octa SoC
  • 32GB of storage

Apple, on the other hand, gives you the following for $299 on contract:

  • 4″ 1136×640 display
  • 1GB of RAM
  • Apple A7 SoC
  • 32GB of storage

Now, thanks to the superiority (to many customers, anyway) of iOS and the power of the Apple brand, Apple can get away with offering “less” hardware for the same price, but just how much longer can this last?

It’s clear that in order to preserve its margin structure, Apple could not, say, offer 2GB of RAM to go with its new flagship (and moving to 64-bit – which leads to a 20-30% increased memory footprint – without increasing the RAM size seems to be indicative of this). But Samsung has no problems sticking in 3GB of RAM and calling it a day since it produces its own DRAM.

The same thing on the display side of things. Since Samsung builds its own displays, it can not only invest in next generation display technology to gain an edge on competitors, but it can also afford to put such displays in the devices that it sells at very attractive cost structures. Apple, on the other hand, needs to pay somebody else’s margins for its displays, which is why it’s not as aggressive on the display front on smartphones as its competitors are.

Finally, Apple has to pay for the fabrication of its applications processor. In fact, it pays this margin to Samsung. Samsung, on the other hand, builds many of the applications processors that it uses in smartphones (although not all as Samsung uses plenty of Qualcomm (QCOM) silicon built at TSMC (TSM) – for now. This will likely change as Samsung does more silicon in-house)

What Can Apple Do?

Apple needs to stop wasting money on buybacks when there is still plenty of growth ahead. It should use this money, in no particular order, to do the following:

  • Buy Micron (MU) so that it will have DRAM and NAND sourced in-house, thereby significantly improving its cost structure. This not only benefits the phones, but the Macs, too. Apple can also make a mint actually selling DRAM to the other players. Apple also gets NAND flash with such a deal, which will only continue to become more important going forward
  • Buy a semiconductor logic foundry. It’s clear that Apple has the volumes to sustain a leading-edge semiconductor foundry, and if it wants to really improve its cost structure here, owning a semiconductor foundry and funding the development of world-class semiconductor manufacturing technology is probably the way to go. I am sure Mubadala is just itching to get Global Foundries off of its hands, so perhaps either a full ownership of that company – or a big fat equity stake – would be the way to go there.
  • Bring display manufacturing in-house. Apple should either outright buy a company that can build its device displays for it (again, Apple has very nice scale with iPhone, iPad, and Mac), or it should make a very big equity investment in such a firm. Sharp Corporation would only cost Apple ~$5b (assuming a 40% premium to current market price)

So, how much would it cost for Apple to do all of this? Well, buying Sharp would probably cost the company about $5B, Micron would probably cost $30B (slightly over 50% premium to current price), and buying Global Foundries may cost at most $20B. All in all, we’re looking at a shopping spree of about $55B. While this is certainly not a trivial amount of money, it’d all be a much more effective way to create shareholder value than an the absolutely insane (I mean this as negatively as possible) $150B buyback that Icahn is trying to push management into pursuing. I get that Icahn wants quick returns today, but Apple needs to focus on delivering long-term value. Buying back stock when there’s another leg of growth to be had is simply foolish.

In fact, Apple should probably issue stock to do most of these deals. Yeah, it dilutes the shareholders, but so what? If Apple can successfully integrate these acquisitions, then they should eventually drive meaningful top and bottom line growth and the share price could be at well over $1000 as it would be in a position to take back significant share from Samsung and own the majority of the smartphone space.

Bottom Line

Will Apple do this? Probably not, but the point is that Apple needs to drive the next leg of its growth, and it needs to do so by becoming much more like Samsung (and beating it at its own game thanks to its own advantages). Samsung, at its analyst day, says that it sees a path to $400B in revenues by 2020. Apple needs to be able to see the same or this stock will be dead money at best and set to decline substantially at worst.

Source: Samsung Is Apple’s Worst Nightmare

AAPL. Graphics: sizzle

The new 64 bit CPU makes a difference–with other upgrades. Techy, but interesting. And if you like camera details=—check out this. http://www.engadget.com/2013/10/12/camera-showdown-iphone-5s-vs-iphone-5-tested-in-the-wilds-of-p/

 

TOM SHAUGHNESSAY

Overview:

My good friend and I were addicted to building computers and seeing how vibrant games like “Battlefield 2 Special Ops”, “Battlefield 3” and the “Command and Conquer” series popped off of the screen. At the time we had the Intel (INTL) core 2 duo 2.66 GHZ processor, two gigs of ram and a 512 mb graphics card by Nividia (NVDA). When the news broke regarding Apple’s (AAPL) drive to double the speed of the iPhone 5 with the iPhone 5S and to include a 64-bit processor, I was blown away. The first thing that went through my mind was the ability to now play powerfully real games that would be groundbreaking on a mobile device – and let me tell you, I was surely amazed.

Tech Specs:

It is no surprise that the 5S has a lead over the 5 under the hood, sporting the new 64-bit A7 chip compared to the older 32-bit A6 chip.

(click to enlarge) (Source)

Everyone is aware of the differences in specifications, although how does this compare over to the actual experience of the user? Below are two benchmark tests that demonstrate the graphics differences between the iPhone 5, the iPhone 5S and some industry peer devices such as the Samsung (OTC:SSNLF) Galaxy S4.

(click to enlarge) (Source)

(click to enlarge)

As we can see from the two above benchmark tests, the iPhone 5S crushes the iPhone 5 and earlier models with regard to graphics. The first test is an extremely intensive GPU test to see how the device’s graphics card holds up, a competition the 5S won easily. The second test shown is a heavy game simulation test, where the iPhone 5S crushes, is able to deliver smooth game-play at 35fps (frames per second) – being the first device to crest the 30fps barrier.

Enough of the Specs, Get To The Games:

I don’t blame you, looking at charts gets annoying – unless you are using the new Numbers, Keynote or Pages applications that ship with each new iPhone. These apps are so powerful that functions can be used in Numbers, full presentations can be created in Keynote and Pages is reminiscent of Microsoft (MSFT) word. You can even track changes with these apps, share your work through mail or messages or use templates. I was skeptical at first, thinking that the screen would be too small to create projects, although these applications are user friendly with features such as the disappearing text bar, zoom and other creative features.

Now For The Real Game: Right on Apple’s website, it boasts the new A7 chip alongside a picture of a game called “Infinity Blade 3“. At first I was shocked at the graphics power conveyed by the image, although I wanted to take a look deeper into the game and see the real graphics processing power. Even though there are screen-shots available on the company’s website, I have been in contact with the company and have been allowed to post my own screen-shots from the game.

(click to enlarge)

Going from the bright outdoor environment, to the darker ones – the graphics in “Infinity Blade 3” are simply amazing on a mobile device.

(click to enlarge)

The fighting scenes in the game are truly compelling, but even better is the fact that the game is easy to play on a mobile device and you do not miss having a controller.

(click to enlarge)

The amazing part of all of this is the mixture of the iPhone 5S’s extreme computing power coupled with the insane craftsmanship in the available applications.
What Else Does The iPhone Pack?

The iPhone is a very advanced device. Honestly, I was angered by some people’s viewpoints that the device was not an advancement or that users did not enjoy the device. Below are some other facts that I would like to compound – that I have come across while using the device:

  • The fingerprint scanner is not only fast, it is very accurate. You can even purchase apps on the app store through the device.
  • The new camera is amazing. The two flashes feature a possible of 1000 combinations of the flash for the best picture possible. The sensor on the 5S has been increased to 1.5 microns along with a f/2.2 aperture to allow more light in. Engadget has an amazing comparison as well on this topic.
  • The 5S also has a 120 fps slo-motion video mode.
  • The new line of real leather colored cases compounds the premium feel of owning an iPhone. Personally, I would have thought the new Burberry Executive addition to Apple would have been the one to present this idea.

What Does This Mean

As a dear friend led me to the concept, the new capabilities in the iPhone 5S are tangible. The user can hold Apple’s innovation and experience the next generation of mobile power that is only available on an iPhone 5S – another foothold gained by Apple’s brand power. Articles can come about attacking Apple’s future and the advancements of its competitors, although one thing is now A7 clear – Apple is the one setting the bar on mobile devices. Personally, I had an iPhone 5 and an iPhone 5S in addition to a string of Android devices and even BlackBerry phones a while ago, and I have to say I am again amazed at the iPhone 5S. Although this article focuses mostly on the graphics power of the new iPhone 5S, there are many advancements that can not be seen through a game – such as the increased LTE bands for connectivity that can all be found on Apple’s website.

Source: The iPhone 5S’s Graphics Are Insane

Additional disclosure: This article is meant be informational, do not execute any trades before talking to a financial professional to make sure an investment/trade is right for you.

AAPL and INTEL: CHIPS and CHIP POWER

OCTOBER 15th INTEL INTC

On the earnings front, Intel Corporation (NASDAQ: INTC) reported fiscal third-quarter results that exceeded expectations while revenue came in flat from a year ago. The chip maker’s EPS came in at 58 cents a share, earnings excluding items, on revenue of $13.48 billion, compared with a profit of 58 cents a share on revenue of $13.46 billion a year earlier.

Wall Street had expected the company to issue quarterly earnings of 53 cents per share on revenue of $13.47 billion, according to analysts polled by Reuters.

Shares of Intel fell 2.44 percent to $22.82 per share in extended-hours trading.

MICROSOFT MSFT

For the second straight quarter, Microsoft witnessed a growth in its business segment, which was in line with analysts’ expectations. In its earnings call, Microsoft Corporation (NASDAQ:MSFT)’s CFO, while sharing his thoughts on the PC market, said that the segment has seen some improvement, more than expected.  Also, management is witnessing stabilization in the business segment with growth in two straight quarters, and expect a balanced growth outlook for quarters ahead. For the quarter, Microsoft Corporation (NASDAQ:MSFT) posted a profit of $5.2 billion or 62 cents per share, which is an increase of 17% over $4.5 billion, or 53 cents for the corresponding quarter of the last fiscal period.

AAPL

On September 10, 2013, Apple (AAPL) brought its latest iPhone 5S to market. Immediately upon launch, hipsters, teenage girls, and celebrities were abuzz with chatter regarding the merits of new iOS 7 features, which were made complete with fingerprint recognition and Touch ID button.

Meanwhile, technology geeks were eagerly deconstructing the potential of the A7 processor driving this latest iPhone installment. The A7 is unofficially hailed as the first 64-bit chip to be installed within a consumer smart phone. Competitors, such as Anand Chandrasekher, former Chief Marketing Officer at Qualcomm (QCOM), immediately circled the wagons to haughtily dismiss the A7 chip as a “marketing gimmick.” According to Chandrasekher’s thesis, the consumer smart phone market will have no need to leverage the full capacity of a 64-bit chip. Interestingly, Qualcomm promptly changed Chandrasekher’s role at the company following said commentary.

Enter Intel (INTC), which in actuality, stands to lose the most from the expansion of this A7 chip rollout. Firstly, Intel is desperate to emerge as a real player within the mobile chip market. Secondly, Apple has already marketed its A7 processor as “desktop class.” Going forward, it would appear inevitable that the advances of A-Series chip technologies threaten and replace Intel’s current position as supplier to the Mac, at the same time that the desktop computer market slogs through secular decline. The Apple A7 is but an opening salvo declaring this latest war between awkward Silicon Valley rivals and partners. Certainly, Apple “haters” are well aware of the fact that BlackBerry executives once ripped the original iPhone as “amateur hour.” Intel is dead money.

Apple A7 Specifications

The Apple A7 64-bit system-on-a-chip (SoC) line is based upon ARM (ARMH) architecture. Apple has designed its 1.3 GHz dual-core Cyclone CPU around the ARMv8-A instruction set. In terms of battery power, the A7 can run the iPhone 5S for 10 hours worth of 3G talk-time, and for 250 hours during stand-by mode. The Apple A7 chip is produced through a 28 nm manufacturing process at Samsung (SSNLF). The A7 gate pitch, or distance between each transistor, is now 114 nm, in comparison to the 123 nm mark of the A6 chip. Apple executives claim that the A7 is twice is fast as its A6 predecessor.

The ARM business model alongside the emergence of Apple as a chip designer now threatens Intel’s profitability within the mobile space. ARM collects royalty payments off chips manufactured according to its architecture and intellectual property. According to the Company Overview, ARM based technology has already been installed within more than 95% of all global smart phones. Qualcomm and Apple are the most powerful component parts of the ARM ecosystem. Qualcomm is most notable for its Snapdragon 800 chips that are packaged with a 2.3 GHz Quad Krait CPU. The Snapdragon is the go-to engine to drive premium Android, BlackBerry (BBRY), and Windows handsets.

Former Intel CEO Paul Otellini highlighted his company’s “mobile edge,” within his 2012 letter to shareholders. At the time, Otellini projected that Intel would be ready to ship 22nm process Atom chips by the end up 2013, before stepping up the manufacturing technology to 14nm through 2014. Last May, Brian Krzanich took up this CEO mantle, and Intel assembly mechanics are now one step ahead of what Apple is now paying for out of Samsung. Still, the Apple A7 chip measures up quite favorably to the Intel Z3700, or Bay Trail, line. One review out of Anandtech benchmarked the Apple iPhone 5 and A7 processor at 514, while awarding a score of 513 to an Intel Bay Trail device running Windows 8.1.

Intel Mobile Product Line Up

Smartphones with Intel Inside include the bargain bin Acer Liquid C1, Motorola RAZR I, and Safaricom Yolo, which are currently available in Thailand, Brazil, Mexico, and Kenya. On October 2, 2013, Lenovo (LNVGF) announced that it was actually dumping Intel Atom, in favor of Qualcomm chips, to power its K900 handsets. The week prior, on August 29, 2013, Virtual Matrix ran a battery life test pitting the Lenovo K900, then powered with an Intel Atom chip, against the Google Nexus 4 and its Snapdragon technology. The Snapdragon chip significantly outperformed the Intel offering, 380 minutes to 170 minutes, in terms of battery life, while running Google (GOOG) Maps. The Intel tablet lineup is largely associated with Windows 8.1. Bay Trail tablets are expected to begin at $350 heading into this holiday season. The Intel Haswell processor powers the up-market Surface Pro 2 tablet, which retails for between $899 and $1,799. The Surface Pro 2 is in direct competition with both the Apple iPad and MacBook Pro at this price point.

On October 4, 2013, research firm comScore released its report for August 2013 U.S. smartphone subscriber market share. The report actually presented averages of data taken from the June 2013 to August 2013 calendar quarter. The comScore information did confirm that Intel has largely been shut out of the mobile market. If anything, the “marketing gimmick” that is the A7 chip will draw sales and attention towards Apple. During this latest quarter, Android and iOS systems operated respective 52.4% and 39.2% shares of the U.S. smartphone subscriber market. Apple actually tacked on 1.5% in additional market share upon a quarter-to-quarter basis through the summer months.

A calendar Q2 2013 tablet shipment report out of IDC presented Windows tablet results that Microsoft critics have already ripped as “pathetic” and “disastrous.” According to IDC, the Windows operating system accounted for 2 million in shipments during the second calendar quarter of 2013. This performance represented 4.5% of the tablet market. For the sake of comparison, Apple iOS generated 14.6 million shipments for a 32.5% share of the tablet market, according to unit shipments. Taken together, iOS and Android operating systems have dominated between 95% and 98% of the tablet market over the past two years. Going forward, improvements upon the A-Series chips will only crowd out Intel further outside of solid mobile profits.

The Bottom Line

On July 24, 2013, Apple released its Q3 2013 financial report for the period ended June 29, 2013. The Mac generated $15.9 billion in revenue upon 11.8 million units sold during the first nine months of this fiscal 2013. In terms of unit shipments, Mac sales have declined by 11% through the past three quarters, upon a year-over-year basis. Going forward, a transition out of Intel Haswell and into A-Series chips may reenergize excitement for the Mac line while also slashing costs of goods sold. Apple engineers will build out their moat larger at the expense of Intel.

Intel typically classifies its businesses according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. The Other Intel Architecture umbrella category does include smartphone, tablet, and netbook chip sales. PC Client Group sales generally account for two-thirds of total net revenue at Intel. Alternatively, Other Intel Architecture has, on average, generated a mere 8% of annual Intel revenue over the past three fiscal years that do largely coincide with calendar years at the company. All recent data out of research firm Gartner have confirmed the secular contraction of the personal computer market. According to Gartner, global PC shipments declined by 8.6% through calendar Q3 2013, upon a year-over-year basis.

On October 24, 2013, Intel stock closed out the trading session at $23.78 per share. This performance did calculate out to roughly $120 billion in market capitalization. Intel may close out this 2013 year with $10 billion in earnings on the books, which would mean that the stock is now trading for 12 times earnings. This valuation is too high a price to pay for a business lacking prospects for real growth. Going forward, Intel share prices will stagnate, while the company returns larger and larger percentages of capital back to investors in the form of stock buy backs and dividends. Intel deserves a sell rating.

 

AAPL: The Reformation

REFORMED BEAR: Terrier Investing

For a long time, I’ve been an “Apple hater”. I’m unashamed to admit that I’m a PC/Android guy. I like being able to customize things, I prefer those OSes for computers and phones respectively, and especially for computers, I don’t like paying Apple’s premium margins when I can get an otherwise equivalent machine (with an OS I like better) for a lower price. A year or so ago, I was convinced that anyone standing in line to buy an Apple (AAPL) product on the day of release was somewhere on the spectrum between crazy and delusional. From an investment perspective, I believed that Apple’s margins and revenues might be unsustainable as the “Apple fad” faded and former fanboys opted for cheaper, equally-featured products from competitors.

However, several recent events have caused me to reevaluate my position, which is why I found a recent article entitled “Apple is in Deep Trouble: A Reformed Bull Speaks Out” to be curious. In the article, the author (Josh Arnold) discusses many of the same points I used to think about – commoditization of smartphones, waning of brand loyalty, etc.

I think those arguments certainly still have some merit, and should be considered by anyone considering a position in the stock. But as anyone who read my previous two articles has probably gathered, I tend to believe that for investors, qualitative analysis is as important as (if not more important than) quantitative analysis. Why is that? Well, as several of my professors used to say, there are lies, damned lies, and statistics. My statistics professor obviously disagreed. Nonetheless, the concept is probably valid, and applies to financial models as well. Garbage in, garbage out, as they say – if you really want a stock to be undervalued, all you have to do is tweak the discount rate and assume a few basis points extra margin and revenue growth (things that nobody will really object to) and boom, there you go. Conversely, if you really want to convince yourself a stock is overvalued, discount their cash for repatriation and jack up the discount rate and be extra-conservative in modeling growth and margins, and pretty soon you get to an ugly target price.

For these reasons, I believe models are primarily useful to help you A) understand how the business looks, operates, and is valued under different conditions and B) give you an idea of what sort of price you’re paying for it.

But even if I model a company and it looks like the stock is a screaming buy, I will refuse to invest in it if I don’t understand the story, the qualitative reasoning behind why this is a good investment. Markets are inefficient, yes, but often not brutally so, especially if we’re talking about a mega-cap that gets analyzed to death. If you think a company has drifted from its intrinsic value by a double-digit percentage, then you’d better have some justification for your variant view. If you don’t have that justification solidly backed up by your analysis of the situation, then who are you to say your numbers are better than the Wharton guys who get paid the big bucks to do this for Goldman and Credit Suisse and David Einhorn?

So Apple, obviously, looks cheap as an investment. Low P/E, lots of cash, etc. I don’t need to get into the details because ten million people (probably literally) have already done that and I’m not adding any value to your day by waxing on about something that everyone already knows. And see, that’s the problem – everyone knows Apple’s cheap on all the traditional valuation metrics. It’s been that way for a while, even when it was growing at a gangbusters pace. When everyone knows something, it’s not a variant view. If it’s not a variant view, how are you going to achieve above-average investment returns? You’re just doing what everyone else is; if you’re doing what everyone else is, you can’t do better than them. It’s impossible by definition.

Where am I going with all this? I agree with Josh on so many of his points – I do think that Apple will struggle to maintain margins if they try to expand beyond ultrapremium products or if their brand loyalty fades. I think most people agree the 5C didn’t work out so hot, etc.

Yet at the same time, while I used to call Apple a fad and laugh at the fact that Apple users’ brains light up like it’s their religion, I also came to the realization that some of the smartest people in my life are Apple devotees. A friend retired from a very lucrative career in management consulting has been an Apple user from day 1; a very smart hedge fund manager has as well. My friend and fellow tech enthusiast Ashraf Eassa called the 5S “gorgeous” after switching from Android and has been raving about the new lineup of MacBooks. There are others (though I know plenty of brilliant PC/Android guys as well).

Quite honestly, I still don’t get it, though perhaps my new MacBook (property of my employer – I’m still not a convert!) will change my mind. I’m open to it – in fact, the more I think about it, the more I realize that 90% of my computer time is spent in Microsoft (MSFT) Word, Excel, PowerPoint, or an internet browser. My experience in those programs should be largely the same as it is now, with a few buttons moved around at the most. Will I become an Apple devotee? I doubt it, although it is kind of amusing to ask Siri where to hide a body whenever I get my hands on my friends’ iPhones. (Between that and a few other joke requests, I can only imagine what the NSA thinks of my friends now.)

Anyway, if someone as anti-Apple as me can grow warm to the products, and if many people I really respect are as in love with their iPhones as the next guy, then perhaps my initial perceptions were wrong, and Apple’s not a fad. Maybe it really is the next brand as persistent as Coke (KO), and it’s not the next Motorola (MSI) or BlackBerry (BBRY).

I still don’t understand Apple, so I won’t invest in it, despite the fact that it certainly looks cheap on many metrics. However, in my reformed position, I cannot fully agree with Josh either – signs I would have taken as “deep trouble” a year ago now look more like continuation of an enigma.

If there’s one thing you should take away from this article, it’s this: know what you don’t know. I’m no longer overtly bearish on Apple, because there seems to be something I’ve been missing in this story. (Please note: I have never been short Apple. I was bearish on the stock but did not take a position.)

Like Josh, I’m willing to admit when I believe I may have been wrong. In this case, however, we seem to have reversed positions (to an extent – I’m not “bullish”, I’m just not bearish anymore). Apple certainly has strengths – I’m amazed, for example, that a laptop shipping out from China a night or two ago is apparently slated to arrive on my doorstep tomorrow afternoon. That takes a lot of supply chain tuning. Plus, Apple’s recent A7 chip is a very competitive offering. Apple clearly has plenty of smart people in their organization; I can’t claim to predict what they can or can’t come up with.

A brief postscript explaining my decision to hold a position in Microsoft but not Apple, despite the former’s continuous and egregious attempts to make investors shake their heads. While I’m not confident enough in Apple’s business model to invest in it, the one thing I am confident in is that enterprise will continue to remain a strength for Microsoft; Apple will also likely not sacrifice margins to compete in the low end of the market, leaving plenty of room for other players.

Ultimately, while knowing something isn’t enough to invest in it, you should only invest in it if you do know it, if that makes sense. If you get Apple and think it’s a rock star investment, then I won’t disagree with you. If, like me, you don’t get it, then that’s fine too – plenty of other fish in the investing sea. And if, no matter who you are, you read a point of view you disagree with – whether on Apple or another stock you have a position in – then you should read it with a clear head and determine if there’s any validity to the argument. After all, it’s your money on the line; why let emotion or pride set you up for a fall?

REFORMED BULL Josh Arnold

Let me preface my remarks here by coming clean about my past views on Apple (AAPL). In the last year or so I penned a number of bullish pieces on the Cupertino giant because I believed the growth expectations from analysts. I believed that innovation wasn’t dead at Apple. I believed that the company could continue to be great without Steve Jobs. I’m here now saying none of those things came true and that Apple is in serious trouble.

The much ballyhooed event that occurred earlier this week was supposed to be something of a game changer for Apple. Instead, what we got was more incremental improvements in its existing product lines. Yes there was a new OS, yes the iPad Air is neat and yes the retina display on the Mini looks great. However, none of these things address the concerns I (and other investors) have regarding Apple’s long term future. How long can it continue to sell the same devices year after year? How long will people settle for the same products that have existed in virtually their current forms for years? The answer, if market share is any indication, is not long.

In 2011, Apple had something like 65% of tablet market share. Last year, that number dropped to 54% and this year, Gartner expects Apple to be below 50%. Before you point out that one company owning 50% of a market the size of tablets is still amazing, you’re right, it is. However, the amount of customers voting with their feet and buying Android is staggering. Where is the bottom in terms of market share for Apple? We don’t know but this looks a little like BlackBerry (BBRY) did several years ago; “Yeah we’re losing market share, but so what?” could probably be heard in the halls of the corporate campus of BBRY in years past. The fact is there are far too many very good competitors for Apple to maintain a 50% market share over the long term in my view and it looks like we’ll see the market share number continue to fall as Apple clearly has no intention of innovating in the space any more. Making an existing product lighter is great but it’s no reason to run out and buy one (not to mention the ridiculous premium one is charged for the Air model). Where are the new features that blow our collective minds? I don’t see them in new iterations of the iPad and I think it’s because Apple is out of ideas.

The company also came out with the retina display for iPad Mini, which, again, is great (and 100% telegraphed prior to the event) but it’s no reason to run out and buy an iPad that you weren’t already planning to buy. There were also the usual processing power and battery life upgrades but all of these things are evolutionary, not revolutionary, and we’ve seen it all before. I don’t think Jobs would have settled for this long with Apple’s current product lineup and incremental change after incremental change. Maybe we’re all too spoiled by Apple’s rise from a nearly defunct computer manufacturer to the largest company in the country but there is nothing to be impressed by anymore.

Perhaps even more disturbing, Apple cut prices on a version of its iPad Mini. This coming from the company that historically discounts sparingly and is notoriously strict with its retail partners in terms of ensuring the premium for Apple products is respected. Apple’s margins have been falling for several quarters now due to a confluence of factors including lower ASPs and lower sales. In fact, for the first time ever, Apple sold fewer iPads in the June quarter this year than last year. The point is that the lack of innovation is catching up to the company’s operating results and shareholders should be concerned.

When Apple has tried something new, the iPhone 5C, for instance, it hasn’t worked. Yes, the 5S is apparently selling like hotcakes in relation to the C but I suspect Apple only had to raise its builds for the S because it was cannibalizing C sales. And besides, the C is just another iteration of the iPhone; it once again isn’t innovative or disruptive, it simply seeks to compete in a slightly different way. I acknowledge the formula Apple has worked with for years has succeeded like no other and made it the largest company in the country. However, tech companies, particularly hardware suppliers like Apple, always have to innovate or they will go by the wayside eventually. Is Apple the next BBRY or Nokia (NOK)? Maybe, time will tell. But the company is well on its way with its lack of innovation and new products.

With EPS expected to have fallen a whopping 11% for fiscal 2013 to just under $40 per share, Apple shareholders experienced a violent revaluation of shares in the past year or so. This company went from constantly destroying estimates to suddenly missing them and then to declining earnings. Given Apple’s inability to gain traction with the 5C and the marginal changes to the entirety of the iPad lines, I just don’t see how the company will be able to post the 10% earnings growth that is expected for next year. You have a company with declining margins, falling ASPs, a stale product line and its competitors taking market share in tablets and phones every day. Where is the growth coming from? With iPad sales numbers declining YoY and the iPhone 5C clearly a bust, I suspect there is decent downside risk to analyst estimates at this point. Even if Apple can somehow manage to hit its revenue estimates, margins are declining so rapidly that EPS would likely still be light.

Apple looks cheap at only 12 times next year’s earnings. In fact, 12 times earnings for a company with a declining customer base, declining margins and no catalyst for growth in the near to medium term is probably too generous. The fact is Apple gets the vast majority of its revenue when it sells a device; it doesn’t have the luxury of a recurring revenue stream like Oracle (ORCL) or IBM (IBM), which, by the way, sell for only 10 and 9 times next year’s earnings, respectively.

If you were fortunate enough to own Apple over the past three months you should take what the market has given you and get out. With declining market share, falling margins and no catalysts on the horizon, I think Apple could (and should) trade down to a multiple of 9 or 10. And given that I think there is a decent possibility for an earnings miss on next year’s $43+ EPS estimate, fair value for Apple is likely in the $380 to $420 range based on $42 in FY2014 EPS and my PE range of 9 to 10. That is a long way down from where we are now (shares saw $700 last September and by April, were languishing below $400, so it could happen) but Apple is currently receiving a multiple it doesn’t deserve and I think that the company will struggle to reach $43 in EPS next year without some kind of transformational new product. But given that Apple clearly has no imagination left whatsoever, I’m not holding my breath.

made to accuracy or completeness. I am long the companies mentioned in the disclosure and may change my position at any time without notification. Please see the full disclaimer in my profile, and do your own due diligence before making any investment.

AAPL: Sell the News

Michael Blair Disclosure: I am short AAPL.

Apple is a big company with a massive market capitalization and it needs big news to move the needle higher. New products which are incrementally better, and in the case of the A7 processor a lot better, may not be enough to convince investors that Apple will not suffer the reality that many competitors have entered what is a maturing market and despite its incredibly good products Apple is losing share.

I am short Apple calls at $515 strike with a January 2014 expiry. I may add to the short by shorting the stock on any strength.

The tablet war is getting interesting. Launched by Apple (AAPL) in April 2010, the iPad created the tablet market which immediately took a bite out of personal computer (PC) demand, much to the chagrin of companies tied to PCs like Microsoft (MSFT), Intel (INTC) and Hewlett-Packard (HPQ).

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Tablets are primarily consumption devices rather than computers used for creation of content or for work in enterprises. The major casualty of their popularity was lower priced laptops and “netbooks” which were also popular for consuming content rather than creating it.

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Having created the market, Apple dominated tablet sales for an extended period until it attracted competition, in particular from Android devices. By the second quarter of 2013, Android-based tablets had more than doubled Apple’s global market share in tablets with 67% of the market. Apple’s market share dropped from 47% to 28% over the previous year not only as a result of Android’s success but also as a result of the more than fourfold growth of Windows-based tablets, albeit from a very small base.

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Apple’s efforts to protect its position included upgrades to the iPad annually and the introduction of the iPad mini in October 2012. The popular iPad mini sold well but did not stop the relentless erosion of market share.

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While the iPad mini did not stem the market share erosion Apple was facing, it did displace full sized iPads. At the same time, in the Android space, Amazon’s (AMZN) Kindle Fire tablet was a hit with consumers along with various Samsung Galaxy tablets of differing form factors. By the fall of 2013, almost one in five iPads sold was an iPad mini, while Samsung Galaxy tablets represented a full 55% of the Android tablets sold followed by Kindle Fire tablets representing another 21% of Android tablets.

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Microsoft’s efforts to get into the tablet space got off to a rocky start. Microsoft introduced the Surface RT tablet running on an Nvidia processor based on an ARM Holdings design and a Surface Pro tablet based on an Intel chip and capable of operating all Windows software in much the same fashion as a PC. Critics panned the devices. The RT model was criticized for having little application support and the Pro model for having inadequate storage and limited battery life. Despite a large advertising campaign neither the RT nor the Pro model sold particularly well and Microsoft took a $900 million charge to write down inventory.

At the same time, in Asian markets, smartphones with larger than 5 inch screen sizes called “Phablets” took off in terms of consumers demand, surpassing tablets in volumes by the first quarter of 2013 in the Asia Pacific region.

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Fast forward to October 22, 2013, when Apple launches the new iPad mini with retina display and a new full sized iPad based on the powerful A7 processor and in a thinner chassis, to be called the iPad Air. As you might expect from Apple, both devices are gorgeous to look at and continue Apple’s outstanding combination of design and innovation.

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Coincidentally Nokia (NOK) also launched a new tablet, the Lumia 2520, another very nice looking design based on Microsoft’s RT operating system and shipping with a full version of Microsoft Office.

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The question for investors is whether the announcements will have an effect on share prices. Given that Nokia’s handset business is about to be acquired by Microsoft and that the handset business is likely to be a small part of Microsoft for years to come, I would not expect the market to react to the Nokia announcement.

The real money to be made or lost is in the case of Apple.

Apple stock typically rises in anticipation of new products as it did leading up to the iPhone 5s and iPhone 5c announcements.

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But, typically, the stock falls away in the weeks following the news.

(click to enlarge)I don’t expect this announcement to be any different. The news is out now, and while it is good news it is unlikely enough good news to offset the competitive forces the market sees and in my view fears.

Apple is a big company with a massive market capitalization and it needs big news to move the needle higher. New products which are incrementally better, and in the case of the A7 processor a lot better, may not be enough to convince investors that Apple will not suffer the reality that many competitors have entered what is a maturing market and despite its incredibly good products Apple is losing share.

I am short Apple calls at $515 strike with a January 2014 expiry. I may add to the short by shorting the stock on any strength.

$48 for 530 strikes before Jan 2015

Investors who share our outlook can either buy Apple shares at current levels, or if interested in limiting downside risk, can possibly purchase calls expiring January 2015 with a strike of $530 for about $48. Break-even level would be about $578. As long as Apple Flight 800 reaches its destination (or even a fraction of its destination) by January 2015, investors would generate profits. Otherwise, investors could lose the premium spent on the options.

Bachar Samawi.

Apple At $800: Flight Delay Or Cancellation?

Oct  7 2013, 11:14            | 39 comments                      by: Bachar Samawi  |             about: AAPL

On August 15, 2011 we wrote an article titled: “Who will take a bite out of Apple? Anyone?“, where we identified 9 hurdles that a technology company would have to overcome in order to take a bite out of Apple (AAPL). At such time, on a dividend and split adjusted basis, Apple shares were trading at $372.89. We concluded that only a radical shift in technology (in case Apple is unable to capitalize on) can possibly take a bite out of Apple, or possibly Apple can take a bite out of itself due to severe mismanagement, both of which we concluded were highly unlikely. We followed with a series of additional Apple articles, calling for Apple to reach $400, $500, $600, $700 and $800. Apple shares were flying high, reaching all our predictions with the exception of the $800 destination. Is this a severe flight delay, or is it a flight cancellation?

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Apple Stock from 1/1/2011 to 10/4/2013 – Source: Yahoo Finance

We would conclude it is a flight cancellation only if the above two stated reasons have come to fruition. As far as competition from Samsung and others, we still believe they lack the ability to overcome some of the nine hurdles we described in 2011. Specifically, we do believe that Samsung still lags behind Apple in innovation, creativity, design and integration. Most importantly, on the integration and innovation side, Apple is distancing itself from the competition by moving its entire product line to the 64 bit A7 processor in record time, as outlined by an excellent article by Ed McKernan, “The coming market impact of Apple’s 64-bit A7.”

As far as Apple being subjected to a radical shift in technology introduced by others, that certainly hasn’t occurred during the past two years. As a matter of a fact, one can go further and argue that it is Apple that is actually leading a radical shift in technology through its migration to the 64 bit A7 processor. In addition, Apple is still leading in the introduction of non-radical technological improvements such as fingerprint recognition enabled iPhone, voice recognition capabilities, etc. …

Has Apple taken a bite out of itself? Well, maybe it has taken a nibble … There is no question that the passing away of Steve Jobs was a loss for Apple and the entire technology industry. However such unfortunate event is beyond anyone’s control. As we stated in our 2011 article:

There is no question that Steve Jobs has a lot to do with Apple’s success. However, it is highly unlikely he did it all on his own. As a company matures, as long as it is true to its vision, mission and philosophy, and as long it continues to be able to attract the brightest minds, it will flourish. Apple is well managed, as is evident by Steve Jobs extended health leaves.

Apple nibbled on itself at the introduction of its iPhone 5 in 2012. Its margins and sale volumes were hurt due to shortages and limitations of large scale manufacturing capabilities by Apple suppliers for some components such as in-cell touch screens and 4G LTE wireless chips. Apple also nibbled on itself through the introduction of Apple Maps where the software was released while it still contained flaws in providing driving direction. Nevertheless, both such nibbles were somewhat inevitable.

In a sense, we sometimes need to nibble, not necessarily because we are about to take a bigger bite, but because we are tasting, in order to improve the recipe … The introduction of a new technology, necessary in order to stay at the forefront of innovation and creativity, can often meet initial manufacturing production line challenges which are ultimately overcome. Similarly, mapping software is quite complicated, and sometimes placing such software in use is the best way to discover its shortcomings in order to improve it and strengthen it.

So if Apple has not taken a bite out of itself, there has been no new disruptive technology, and competition is still unable to overcome the 9 hurdles, then what happened to the Apple flight? It is delayed. However, it is not delayed because the plane is not fully serviced, refueled and ready to take off. It is delayed because the passengers are taking their time in boarding the plane.

The flight analogy gives good insight into human psychology. When we rush to an airport to catch a flight, we immediately check the electronic board to confirm the status, then we check in and get to the gate in time with almost total confidence that the flight will be on time. However, once we learn there is a delay, we act almost in total disbelief and disgust. Once boarding starts, as long as other passengers have not boarded yet, we are tempted to stay seated, as it is more comfortable to sit in the lounge than to sit in the cramped plane seat. Once passengers start boarding, and when we feel we may miss the plane if we don’t move, reality hits us that the flight will take off after all, and we then rush in a hurry to get on board.

Now is boarding time for Apple shares’ delayed flight. Apple shares are currently trading at a price of $483.03 as of the close of October 4, 2013. With analysts’ estimates of $39.33 for the year ending September 2013 and $42.99 for the year ending September 2014, Apple shares have a price/earning ratio of 12.28 and 11.24 respectively.

Apple’s market capitalization is currently $438.83 billion. Meanwhile, it is estimated that Apple currently holds 10% of all corporate cash. When we exclude Apple’s $147 billion in cash and long term investments, with an adjusted market capitalization of about $292.2 billion, Apple’s adjusted price/earning ratios would be 8.17 for the year ending September 2013 and 7.48 for the year ending September 2014.

During the next several weeks, there is good likelihood that analysts’ average earning estimates for Apple will be revised higher for the year ending September 2014. Analysts had expected Apple to sell about 6 million iPhones during the launching weekend in September for the iPhone 5c and iPhone 5s, while Apple exceeded such expectations by selling over 9 million iPhones. Apple has benefited from signing up Japan’s largest mobile carrier NTT DoCoMo, in addition to the early launch in China.

Some would counter such outlook by claiming that Apple will lose the luster of some of its products such as the iPhone. I believe we are still many years away from such potential materializing. As an example, I have been opposed to buying my children a $600 to $700 phone based on principle. Yet, my 15-year old daughter this summer accepted an internship that only paid her $200 per month. In addition, she launched a baking business, hence working a total of no less than 6 hours per day including weekends. By the end of the summer, she had saved about $700, which she then spent it all on buying an iPhone. I was not happy and confiscated the phone as I found it to be too extravagant for a 15-year old to have. Naturally, I caved in and let her have the phone within a few hours; as she explained, the main reason she had worked hundreds of hours was to buy the iPhone. I asked her how she would feel if it was lost or stolen the next day. She replied that she would work again hundreds of hours to buy another one …

Although some analysts may be hesitant to upgrade their earnings forecasts as they may deem such weekend launch success as a seasonal factor, it does confirm to us that production bottlenecks that haunted Apple last year are less likely to repeat. This would lead to improved margins, as Apple has already provided an upgraded guidance by stating its margins would come in at the top end of its forecast of 36 to 37 percent. Hence, average estimates for earnings of $13.75 per share for the quarter ending December 2013 could prove to be conservative.

Given Apple’s incredible cash generating capacity, its dividend yield of about 2.5%, its existing dividend and share buyback program of $100 billion (while being lobbied by investors to increase its share buyback as per Icahn’s push for a $150 billion share buyback program), the encouraging prospects for iPhone 5c and 5S, the attractively low adjusted price/earning ratio of 7.48 for the year ending September 2014 (upon exclusion of its cash and long term investments), its migration to an across the board advanced 64 bit A7 chip technology, we believe Apple shares can record substantial gains during the months ahead.

APPL: From when it was $400. And the September Follow up.

July, 2013 and September, 2013

Apple Inc. (AAPL): 5 Reasons The Stock Is A Buy

July 9th, 2013

fiveWith Apple Inc. (NASDAQ:AAPL) bears feeling vindicated by the company’s fall from grace and shares hovering in the $400 range, it might sound like a stretch to say Apple stock is a buy.

But given all that’s happened, AAPL at $400 is a better deal than it may appear.

“It’s obviously been hit, but it’s bounced. It’s held up,” said Money Morning Capital Wave Strategist Shah Gilani. Pointing to the recent volatility in the markets, Gilani said, “The markets have been hit really hard and Apple has held up beautifully.”

Now it’s not likely that Apple stock will take off again like it did a few years ago and shoot up 100%.

But despite slowing sales of the iPhone, the company is still generating profits at the rate of about $40 billion a year and sports a P/E of less than 10. And it now has a dividend yield of about 3%.

The landscape may have changed for Apple over the past year, but it’s certainly not the dead money that some believe it is.

In fact, Apple stock could very well be on the verge of a nice little ride to the upside, at least to $500 and maybe beyond.

There are several reasons to think that a rebound in Apple stock is in the offing.

Five Reasons Apple Stock (NASDAQ:AAPL) is a Buy

Reason #1: Sellers Have Been Washed Out “Wall Street has basically given up on Apple,” Business Insider CEO Henry Blodgett wrote in a Daily Ticker column last week. Just as sentiment on Apple stock was overly optimistic in its dramatic run-up, so now has it become overly pessimistic. Apple stock has slumped more than 40% from its peak of $702.10 reached last September, and has hovered around $400 since March.

But just about everyone who was panicking over the drop in price has sold the stock. We know this is the case because of AAPL’s relative stability through several recent volatile market sessions, as Gilani pointed out. That has set the stage for a reversal to the upside based on a string of positive developments.

Reason # 2: The Low-Cost iPhone opens Up New Markets  One of the primary concerns dragging down Apple stock is that the iPhone isn’t seeing the sort of sales growth it did in its early years. Since the iPhone is responsible for about half of Apple’s profits, that’s a problem. But while competition from Android-based phones has taken a toll, the real issue is that the market for pricey high-end smart-phones is nearing saturation. That’s why rivals like Samsung Electronics (OTC: SSNLF) and HTC Corp. (OTC: HTCKF) have gotten hit with slowing sales, just as Apple has.

But Apple may be about to spring a game-changing solution on the market – an iPhone that almost anyone in the world can afford, yet preserves the company’s high profit margins.

While Apple never discusses products in development, many are convinced that such a “cheap iPhone” will debut as early as this fall. It would give Apple the chance to capture hundreds of millions of new customers in places like China, Brazil, Russia and India.

Credit Suisse analyst Kulbinder Garcha believes Apple could sell a low-end iPhone for $329 and yet preserve gross margins of about 38% — only slightly lower than the gross margins for the flagship iPhone 5.

Over time, as production ramps up and costs per unit come down, Morgan Stanley analyst Katy Huberty thinks a low-cost iPhone could end up with gross margins better than he iPhone 5.

By 2015, Garcha sees a low-end iPhone gobbling up 40% of the market for phones in the $300-$400 range and adding $5 per share to AAPL’s earnings.

Reason #3: Customer Loyalty If Apple’s low-end iPhone does indeed bring millions of new customers into the Apple fold, it will bode very well for Apple stock long term. All those people will get a taste of Apple’s legendary ease of use, as well as its very “sticky” iOS ecosystem of music and apps.

In fact, Apple has an almost unheard of customer retention rate of over 90%.

“That’s really unique in the history of consumer products,” Raymond James Managing Director Tavis McCourt told CNBC last week. “As long as the subscriber base is growing like it is, and we believe it’s growing 30%-plus, at some point that retention rate and the subscriber-base growth will turn into earnings growth as you get a product worth upgrading to.”

McCourt thinks Apple stock is a strong buy, and has given it a price target of $600.

Reason #4: The iWatch and Beyond Another major factor that has pulled Apple stock lower has been the absence of the Next Great iThing. But lately many reports have surfaced of Apple securing trademark rights to the name “iWatch” in such far-flung places like Russia, Mexico, Japan, Taiwan and Jamaica.

Wearable computing figures to be one of the next big trends in consumer electronics – with Google Glass being an early example.

While the existence of the iWatch is speculative, it’s a device that makes sense for Apple (it supposedly would pair up with a user’s iPhone.)

While an iWatch probably would only add incremental revenue and profit, it could play a vital role in reversing Wall Street’s perception that Apple has lost its ability to innovate.

Furthermore, an iWatch could be a first step toward an entirely new business for Apple – embedded computing. That’s when you have computer functionality built right in to your car or even your clothing.

Apple has the brainpower on board to do embedded computing better than anyone else.

Reason #5: The Cash Hoard On the one hand, Apple’s $145 billion cash stockpile is another positive for the stock. For one thing, the cash alone accounts for about $150 per share, which makes the current price of $412.71 look like even more of a bargain.

But that’s not all. The cash is also a factor in Apple’s dividend. At the moment AAPL’s payout ratio is a ridiculously low 19%, which not only means it can easily afford the dividend it pays now, but can afford to raise it substantially in the future.

And one more thing. Gilani noted that Apple will earn much more on its cash pile if interest rates rise as many believe they will over the next year or so. More oddly, though is that even the money Apple recently borrowed to pay for its dividend will be a plus.

“Their $17 billion bond offering is actually going to be a positive for them in terms of their financial metrics because under the wonderful accounting rules, as bond prices fall for the debt that they’ve issued, they get to declare that as a profit because technically they can buy that back at a cheaper price,” Gilani said.

AND THE: TOLD YOU SO!

When the Apple stock price (NASDAQ:AAPL) slipped below $400 in April and again in June, a lot of Wall Street pundits concluded that the company was a spent force and moved on.

But just when it looked like the Apple bears might be right, the company started to gain back lost ground.

From the year’s low of $385.42 on April 19, AAPL has climbed nearly 27% and is again close to $500.

Much of the recent spurt in the Apple stock price came thanks to much higher than expected sales of the new iPhone 5S and iPhone 5C models in their debut weekend. Analysts had forecast sales of 5 million to 7.75 million units, but Apple announced sales of 9 million.

Apple also raised guidance on both revenue and profit margin for the current quarter to “near the high end” of its previously provided ranges.

That was good enough for a 5% pop in the Apple stock price Monday. But Money Morning Capital Wave Strategist Shah Gilani says the latest surge in the Apple stock price is just the beginning.

“If this stock gets above $515 or maybe $518 – and then consolidates between, say, $500 and $515, you darn well better own this stock – it’s going to $585 … it’s going to $600,” Gilani said.

Why the Apple Stock Price Will Keep Rising

Gilani made his call on AAPL all the way back on July 10, early enough that the stock has gained 15% since.

He gives six reasons for why he thinks the Apple stock price still has a lot of upside to come:

  • The new iPhones are just the beginning of several new products Apple will announce this fall. Plus, it’s widely suspected that the company is working on a wearable technology device, such as the iWatch, as well as something related to television.
  • With a forward Price/Earnings (P/E) ratio of roughly 11, the stock remains very cheap on a valuation basis.
  • Though Apple did not announce a licensing agreement with China Mobile at the iPhone event, most experts believe a deal is imminent.
  • Clearly the plan to keep the price on the iPhone 5C was a smart one, as Apple sold the most iPhones ever in a debut weekend. Don’t be surprised if Apple lowers the price on the iPhone 5C in January after it has skimmed the maximum profits from the holiday buying season. Then the iPhone 5C can fulfill the role as a mid-range priced option everyone had expected in the first place. A cheaper iPhone will help regain markets share in emerging markets like China and India.
  • Several prominent hedge fund managers, including Carl Icahn and George Soros, have moved into the stock in recent months. They didn’t build their reputations by buying losers.
  • Apple is likely to continue increasing its modest dividend, which pays a yield of 2.6%, and is in the midst of a large stock buyback program (which could get even bigger).

“The bottom line here is that Apple stock has been strong since we recommended it,” Gilani said. “And it’s going to get stronger.”

 

This article is brought to you courtesy of David Zeiler From Money Morning.

AAPL to 777! says Cantor Fitzgerald. Still has cash of $140 per share.

Apple Inc. (AAPL) Saw ‘Healthy Growth In September’: Cantor Fitzgerald. Today, October 7th, with all the shut down talk, it still went up $8. Has a long way to go to get to $777, That is a 58% increase.

by  October 7, 2013

Cantor Fitzgerald analyst Brian White estimates that Apple Inc. (AAPL)’s September sales rose 9 to 10 percent over August’s numbers.

Apple Inc. (NASDAQ:AAPL)’s September sales data was mainly complete by last week, and analysts at Cantor Fitzgerald say the numbers indicated healthy growth during the month. When they ran their analysis of the company’s sales numbers, they had more than 95 percent of the company’s sales reported.

Apple Inc. (AAPL)

Apple Barometer shows a healthy September

Analyst Brian J. White used data from their Apple Barometer, which measures Taiwan’s top suppliers which generate a high percentage of sales from Apple. According to those numbers, he estimates that Apple Inc. (NASDAQ:AAPL)’s preliminary September sales show they increased by about 9 to 10 percent month over month. That’s nearly in line with the average 11 percent increase over the last eight years but much higher than last year’s month over month increase of 3 percent. It also appears to match up with a survey done by Raymond James analysts, who estimated that the company gained about 10 percent in U.S. smartphone market share.

He notes that historically, the company traditionally launched the iPhone in June or July, although the date was pushed back starting in 2011. As a result, September sales numbers are somewhat skewed.

Apple saw weaker than average seasonality in Q3

White estimates that during the September quarter, Apple Inc. (NASDAQ:AAPL)’s preliminary sales fell 3 to 4 percent sequentially according to their Apple Barometer. That’s well below the average 21 percent increase over the last eight years. He notes that the company’s own third calendar quarter guidance was a decline of 4 to 5 percent. That outlook was far below the typical 18 percent increase in seasonality quarter over quarter.

Apple announced on Sept. 23 that its fourth fiscal quarter sales would be toward the high end of its original expectations He notes that last year the company’s sales for the quarter rose just 3 percent quarter over quarter as the iPhone 5 ramped up.

iPad 5 next on Apple’s list

According to White, Apple Inc. (NASDAQ:AAPL)’s large installed base likely “has an appetite for the iPad 5.” The company is expected to unveil a refresh of the tablet this month, and he said his research suggests that the refresh could offer a significant upgrade cycle. He believes since the company didn’t change the look and feel of its last  few iPad versions, the company’s installed user base may be ready to purchase a new 10-inch iPad. The company has shipped approximately 155 million iPads through the third fiscal quarter of this year.

Apple still Buy-rated

The analyst reiterated his Buy rating and $777 per share price target on Apple Inc. (NASDAQ:AAPL). He based his price target on almost 14 times his 2014 calendar year pro forma earnings per share estimate, plus the company’s net cash per share of $140.29.

The Pocket computer: AAPL Cringely & Umiastowski

GLOBE

Apple launches its iPhone 5s and 5c on Sept. 20, 2013. (Adrees Latif / Reuters) Apple launches its iPhone 5s and 5c on Sept. 20, 2013. (

Apple’s next growth engine: Replacing the PC

CHRIS UMIASTOWSKI Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab.

When BlackBerry Ltd. pre-announced disastrous second-quarter results and 4,500 job cuts, I was en route to Ottawa with my wife to participate in the Army Run. That day – Friday, Sept. 20 – will go down as Black(Berry) Friday for the one-time smartphone giant. But it was also launch day for Apple Inc.’s new iPhone 5c and iPhone 5s.

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I’ve been a die-hard BlackBerry user for almost 13 years. But after I read the bad news on my BlackBerry while my wife navigated the roads, the two of us promptly checked into our hotel, walked over to the Rideau Centre Apple store and bought an iPhone.

Mind you, it wasn’t for me. My wife, who had also carried a BlackBerry for years, had decided to switch. Consider her move one more example of how much the smartphone market is tilting in Apple’s direction.

Over the next three days, the company sold over nine million of the new iPhone models, breaking last year’s record of five million when the iPhone 5 was launched. This tremendous unit growth is in stark contrast to the company’s stock price, which has dropped from about $650 (U.S.) last year to below $500 now. And it’s a major reason I’m still enthusiastic about the stock.

It’s absolutely true that earnings growth at Apple has disappeared over the last few quarters. But I’m not that interested in short-term results. I’m interested in where the company is taking its business over the next decade or longer. The record sales (not to mention my wife’s change of heart) say that iPhone demand is at record levels despite high prices – and I think this could be just the beginning.

What happens if Apple can turn the iPhone into a replacement for the traditional PC? Author and tech guru Robert X. Cringely wrote a fantastic post last week entitled “The Secret of iOS 7,” that points out how Apple’s latest mobile operating system could shake up the mobile and PC industry yet again. His case is based on four observations:

  • Apple CEO Tim Cook announced that the iPhone 5s runs a 64-bit “workstation class” processor;
  • Apple’s productivity software, iWork, is now free on all new iOS devices;
  • Apple’s mobile operating system, iOS 7, now incorporates Bluetooth support for both keyboards and mice;
  • Most industry pundits expect an Apple TV display of some kind to hit the market soon.

Put it all together and you can begin to sense where Apple thinks the digital world is headed. We’re now verging on a point, 13 years after BlackBerry invented the smartphone market, that we have enough computing power in our pockets to eliminate notebooks or desktops.

For now, there’s no way I’m giving up my huge office monitor. But Mr. Cringely makes a strong case that the situation may soon change.

“Jump forward in time to a year from today,” he writes. “Here’s what I expect we’ll see. Go to your desk at work and, using Bluetooth and AirPlay, the iPhone 5s or 6 in your pocket will automatically link to your keyboard, mouse, and display. Processing and storage will be in your pocket and, to some extent, in the cloud. Your desktop will require only a generic display, keyboard, mouse, and some sort of AirPlay device, possibly an Apple TV.”

It’s not rocket science to consider a smartphone operating system and applications that know when they’re hooked up to a large display, and therefore switch to a user interface that fills the screen and looks more like a desktop.

In fact, several years ago, when I was a sell-side analyst at TD Securities covering Research In Motion, I helped a startup company pitch this exact strategy to the BlackBerry maker.

Imagine the appeal to a business: You could connect your smartphone to a cheap monitor and the operating system smartly converts your e-mail and other enterprise mobile apps to full-sized desktop experiences. The cost of supporting remote workers drops tremendously.

As far as I know, BlackBerry failed to take action on what could have been a brilliant plan. But this strategy – if it is what Apple is planning – sets the stage for a whole new leg of growth in both the consumer and enterprise markets for Apple.

Of course, it won’t be easy or painless. I agree with Mr. Cringely’s assertion that Google will also be all over this PC replacement strategy, so Apple would be smart to act quickly. I expect this will lead to both companies dominating the future of computing.

Microsoft and all Windows box makers should watch out. On the other hand, Apple shareholders could do quite well over the next three to five years.

According to S&P Capital IQ, Apple stock trades at 11.5 times next year’s earnings estimates. Investors are paying less for Apple than they are for the S&P 500 index, with a 14.2 times multiple on forward year earnings. So while Apple may have been one of the weakest performers in my Strategy Lab model portfolio over the last year, I’m still very much a fan of the stock.

AppleAAPL-Q  483.41  -6.15  -1.26%