"Apple (NASDAQ: AAPL) is offering a rare opportunity and is now one of our favorite ideas for investors with a multi-year time horizon," says Bill Martin.
In his BullMarket.com, the trading and investing expert explains, "Our bullish thesis on Apple revolves around cash; both the cash on its balance sheet and the cash it is able to generate."
"With approximately $24.5 billion in cash and no debt, about $27.50 of Apple's share price is cash. Meanwhile, the company generated $9.1 billion in cash the past fiscal year.
"Given the way revenue with the iPhone is reported (it's recognized over the life of a contract, not upfront), the cash Apple generates is actually a lot higher than what its earnings indicate.
"Combined, this makes common metrics like P/E ratios not a great way to value the company. If you instead substitute an Enterprise Value (which is basically the market cap with net debt or cash added back in) to cash flow ratio, the stock is trading at only about a 6x multiple.
Apple Inc. (NASDAQ: AAPL) stock is down 54% from its December 2007 high of $200 a share. We know the economy is in rough shape and consumers are cutting back. But by one measure, Apple stock is a bargain. Should you buy it?
Apple trades at a Price/Earnings to Growth (PEG) ratio of 0.75 (based on a P/E of 17.7 on earnings growth of 23.7% to $6.52 in FYE ending September 2010). A PEG value less than one is considered an attractive price. So it looks cheap to me -- but only if you believe that earnings forecast. And economic woes mean it's likely that the numbers will be lower.
If Steve Jobs remains in the CEO position for the next several years, it is reasonable to expect more ground-breaking innovations from Apple. But one short seller is betting that the benefit of any innovations will be offset by the fact that in a weak economy, people will spend less on Apple's products, resulting in weaker Mac sales. And he does not see Apple investing in new products like the iPhone.
When the short interest in companies that are as robust as Apple (NASDAQ: AAPL) increases, it is a sign that investors are willing to bet against almost any firm in this market. For the period ending October 31, shares hold short in the big consumer electronics firm were up 16% to 28.1 million shares. The figure compares with short holdings as of the middle of October.
There is little obvious reason to think Apple will go lower. Its shares are below $94 already, down from almost $203 a year ago. By almost any measure, Apple is one of the most successful companies in the world, with a clean balance sheet, $33 billion in cash, growing sales, and the best products in its market segments.
The theory behind shorting Apple is that its holiday quarter will be weak. But that may be a fool's gamble. Most evidence points to Mac sales continuing to grow sharply even with most PC sales falling. The iPhone is taking market share from all other smartphones. The overall handset category may be down for the rest of the year, but Apple's product is almost certain to pick up sales.
By moving into Apple, a lot of short sellers will get burned.
This post is part of a series in which TheStockAdvisors.com asked financial experts to name their top stock pick if McCain or if Obama wins the election.
"We expect that an Obama-Biden victory will provide a renewed sense of optimism on the part of consumers; to profit from this expected trend is Apple (NASDAQ: AAPL)," says growth stock specialist Nate Pile, editor of Nate's Notes.
"Apple has been crushed this year on concerns about consumer spending. Any improvement in consumer spending that may come from an Obama win should only add fuel to the fire that is already burning brightly for Apple.
"The company's product line-up is one of the best in the consumer electronics space, and as we have been anticipating for a number of years now, success with products outside of the PC market is translating into growth rates for the Mac line that are significantly above the industry average.
"Apple's stock price certainly suggests that there is a huge buyer boycott going on when it comes to tech stocks these days.
"Part of the reason for the continued slide is being attributed to the lack of a 'major announcement' at a recent publicity event, though I believe the fall has more to do with where we are currently at in the 'psychology cycle' on Wall Street than anything else.
"Though we may have to wait until we get through tax-loss selling season this year to see a significant rebound in the stock price, we believe Apple's best days are still ahead of it, and a win by Obama will only help to accelerate the trends that are already underway for the company."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
In July 2006, Apple (NASDAQ: AAPL) dropped below $60 just after announcing quarterly earnings. The market was disappointed. Operating margins for the period were only 13%.
It would be hard to find people who think Apple will fall back to $60, but the dynamics of the company's earnings are such that poor holiday sales could push the stock back in that direction.
For the last calendar quarter of 2007, net income rose 58% to $1.6 billion. Mac sales were unusually strong and iPod units sales were still growing quickly. The growth of the Mac was actually extraordinary. Apple sold 44% more Macs than it had in the last calendar quarter of 2006. The new iPhone had its first really big quarter selling 2.3 million units.
Apple may be facing a holiday season where Mac sales grow very little, iPod sales actually fall and iPhone sales miss Wall Street targets. The Mac may simply be hurt by the recession. There have been over 170 million iPods sold since the product was introduced six years ago; it may be reaching a point of market saturation. No really significant changes to the iPod have been made in over a year.
Problems with the iPhone's connections to 3G high-speed internet networks could hold back its sales.
Apple's stock is down almost 50% since last December. That may just be the beginning.
Douglas A. McIntyre is an editor at 247wallst.com.
A few months ago, it would have been unimaginable that the short interest in Apple (NASDAQ: AAPL) would be moving up sharply. The iPod, Mac and new iPhone were doing too well.
Shares short in Apple had the 10th largest increase of any stock traded on the NASDAQ for the period ending September 15. Shares sold short in the consumer electronics company moved up over 24% to 25.7 million. As it turns out, the move may be a good gamble. At under $129, Apple's shares are approaching their 52-week low of just over $115. The shares are down 25% in the last month compared to an 8% drop in the NASDAQ.
Concerns about sales over the holiday season may be one reason for the bets against Apple. Even its strong brands cannot weather a massive downturn in consumer spending. But Apple's problems may be more complex than that.
The market penetration of the iPod, which has sold nearly 170 million units since it was introduced, is likely to continue its slowing growth. The Mac has done extraordinarily well, but there are questions about whether it can make significant inroads into the corporate market where IT managers do not want to support it along with PCs.
Apple's biggest difficulty may be with its latest product, the iPhone. Buyers have been vexed by dropped calls and trouble getting access to 3G signals. This could put some pressure on demand for the handset.
That is a fairly full set of reasons to stay away from the stock.
According to Moneyweb, software giant Microsoft (NASDAQ: MSFT) is hooking up with Jerry Seinfeld. No, they're not trying to revive the comedian's sitcom career (although that would be cool). It seems Microsoft is feeling a bit blah about its brand equity, so it's looking to initiate a hip advertising campaign that will tout the company's image and its powerful Windows Vista technology.
No doubt, the advertising campaign from Apple (NASDAQ: AAPL) that makes fun of the PC-Windows platform has a lot to do with it. I love those commercials, and I think it's about time Microsoft came to its senses and decided to do something serious to answer them. A campaign with Seinfeld, if done with a maximum amount of creative wit, will work wonders. But of course, that's the point -- it has to be done right. Seinfeld is a big name, and his presence carries a lot of weight with consumers.
Still, I have reservations about using him in an ad campaign. Am I the only one who wasn't impressed by his American Express commercials? I liked Seinfeld in his famous television show, but seeing him pitch charge cards didn't make me want to apply for one. I thought he was boring in the format.
Apparently, ad firm Crispin Porter + Bogusky will be doing the ads featuring Seinfeld, and they were the creative force behind the Burger King commercials with the creepy King mascot. Those commercials rock. It would be nice if the firm could do something as edgy with Seinfeld and Microsoft, but I'm not holding my breath. I'm not sure that kind of lightning could strike twice.
Freddie Mac (NYSE: FRE) announced today that it lost $821 million this quarter and cut its quarterly dividend from 25 cents a share to five cents a share, pending board approval. And it's paying the full dividend on preferred stock.
My question is why is this company paying ANY dividend? I know that dividends aren't necessarily just from profits like you might think. But this company lost $1.63 a share, so why is it giving shareholders even a nickel?
We all know this company may be nationalized eventually, however remote that possibility is under the current administration. We all know that taxpayers are on the hook for up to $25 billion or more for the bailout of Fannie and Freddie. And we know the Treasury can now buy shares in Fannie and Freddie to prop them up. But now it's appealing to shareholders' sense of value by keeping a dividend?
The mall itself, which is scheduled to reopen in the fall of 2009, is seeing a major renovation from an enclosed shopping center to a three-level, 550,000-square-foot open-air retail plaza linking to the Third Street Promenade.
Leading fashion specialty retailer Nordstrom has signed a letter of intent to open a three-level, 122,000-square-foot store in the fall of 2010. "The extraordinary appeal of Nordstrom is a great match for this exceptional market, and for what we believe will be a one-of-a-kind retail project two blocks from the beach in downtown Santa Monica," Randy Brant, executive vice president, real estate, for Macerich stated.
So the Wall Street Journal and a few blogs reported that Apple Inc. (NASDAQ: AAPL) said Tuesday it has filed a suit against Psystar Corp., a Florida-based company that makes and sells computers that run Leopard, Apple's Macintosh operating system software. The suit was filed July 3.
Apple seems to think that Psystar is infringing its copyrighted computers as Psystar's $600 Open Computer "violates an Apple policy that forbids people from installing Apple's Macintosh software on anything other than an Apple-labeled device."
But according to AppleInsider, "A representative for the company, identified only as Robert [argues] that the Mac OS X end-user license agreement, which prohibits third-party installations of Mac OS X on non-Apple hardware, stands in violation of antitrust laws." Rodolfo Pedraza, Psystar co-founder said in the past to the Journal that his company pays for every copy of the software it sells.
I understand what Apple is so worried about. If anyone remembers the IBM Clones of the 80s, they also remember that very quickly IBM has lost the leadership role in the market for IBM PC compatibles by 1990. It wasn't the end for International Business Machines Corp. (NYSE: IBM) as it derived a considerable income stream from license fees. But Macs are not just hardware, they're software too, and we all know what operating system has dominated those PCs. Microsoft Corporation (NASDAQ: MSFT) Windows has become the global leader.
So other than the fact that Apple has different rules on what can run on its computers, iPods and iPhones, including the strict iTunes/iPod relationship, seem strenuous to the extreme and definitely borderline violating some consumer protection laws, it's also possible Apple may be missing on a great opportunity here. The Journal mentions that No. 2 computer maker Dell Inc. (NASDAQ: DELL) is interested in making such Apple OS capable computers, meaning Apple see sales increase ten fold and capitalize on licensing fees as well as software sales.
Then again, knowing Jobs' strict attention to details, his Alpha personality and controlling nature, I'd say that's likely never to happen.
Some investors thought that tech shares would fall apart like financial and transportation stocks have. One by-product of the recession would be a slowing of consumer and business purchases of PCs and enterprise equipment like routers. Internet businesses would suffer from a drop in online ads.
It may be that things are not working out that way. The Nasdaq jumped almost 5% over the last month.
As The Wall Street Journal writes (subscription required), Dell Inc. (NYSE: DELL) jumped late in the week on better-than-expected earnings. The largest of the internet companies, Google Inc. (NASDAQ: GOOG), rocketed after good earnings and has kept most of those share price gains. Consumer electronics bellwether Apple Inc. (NASDAQ: AAPL) has kept moving higher as investors expect a new iPhone and Macs continue to sell well.
Overall, the market may continue to fall. Certainly most companies still run great risks with higher inflation and slowing GDP. Tech seems to have dodged those bullets.
So, according to this piece out on Reuters, Napster (NASDAQ: NAPS) is in a fighting mood. It recently created an MP3 download site that contains over six million tunes. Apple (NASDAQ: AAPL) has been doing gangbuster business for years with its iTunes juggernaut, so it only stands to reason that from now until doomsday there will be initiatives aimed at stealing a little bit of the big guy's thunder. Whether it's Amazon (NASDAQ: AMZN) or Wal-Mart (NYSE: WMT), Apple will always have challengers.
Question is, does this matter? Should Steve Jobs and his Apple shareholders be shuddering in their collective boots? Probably not, although any competition should be taken seriously, I suppose. I grant you that Napster is a recognizable name when it comes to web-based music commerce (heck, Napster started all the peer-to-peer ruckus way back when), and that six million compositions represents an awesome depth of musical inventory, But come on, Apple has staked out one of the most vital components of a successful business: unmatched brand equity.
Simply put, Apple's brand in music downloads is as powerful and iconic as Coca-Cola's brand is in soft drinks. Yes, the Napster service, according to the article, will have an important competitive component, namely the ability to transfer songs to other devices, including the iPod. Napster, as many of you probably know, markets a subscription-based service, but you can bet that management will now concentrate on this download asset.
A company called Psystar has announced that it is selling a $400 computer that can run Apple's Leopard operating system. Psystar is referring to the machine as the Open Computer (a change from the original name, Open Mac) and claiming that it is "The Smart Alternative to an Apple."
I doubt that Apple is very happy with this development, and I suspect that Psystar probably has a few messages from Apple's lawyers on its answering machine. As Wired's blog points out, Apple's end user agreement states that its software can be used only on Apple hardware. Apple has a long and rocky history with clone hardware producers, and has aggressively sought to maintain its monopoly on both its excellent software and the sleek machines it builds to run it.
And that's a shame, because a lot of people would like to buy a Mac but are put off by the price. The most basic Mac Mini is 50% more than the Open Computer, despite being slower and having less memory. Of course, I can't say for sure that the Open Computer works as well as a real Mac. But I hope that Apple will get the message that there is demand for cheaper computers that can run its software. It needs to either produce its own cheaper machines -- such as the eMac I'm using to type this post but that is no longer available -- or allow clone manufacturers to produce on their own. In the long run, it can only help Apple increase its market share.
Microsoft (NASDAQ: MSFT) says it will sell its older OS Windows XP for another two years. The company announced that "the extension is designed only for ultra-inexpensive desktop and laptop PCs too limited to run the Windows Vista system," according toThe Wall Street Journal. XP was supposed to go away because it is old.
The explanation sounds bogus. Microsoft's new OS Vista has had reasonable sales, but reviews of the software say that it is full of bugs and does not help PCs work well with other devices like printers. Apple (NASDAQ: AAPL) has been pushing its OS not just for Macs but directly into the PC market. The company claims that its product works better than Vista and it appears that some consumers are buying into that claim.
There have also been reports that some corporations do not want to upgrade to Vista and will keep the old Microsoft OS running until a version after Vista is produced.
The Microsoft move may have a silver lining. Customers and businesses that want the latest and most powerful Microsoft product can buy Vista. Those who are concerned about the software can use XP, instead of considering the Apple alternative.
Douglas A. McIntyre is an editor at 247wallst.com.
At Apple Inc.'s (NASDAQ: AAPL) annual meeting, the company had an opportunity to calm upset investors. With its stock down from $202 to $124 in just a little over two months, throwing shareholders a bone might have been a good idea.
Apple currently has $20 billion in cash and short-term investments. The company almost never buys other companies. It does not need the money for capital expenditures. Each quarter, the cash balance gets larger.
Apple's faithful are concerned, with good reason, that iPod sales may be slowing. There has been doubt voiced about whether the company can hit its ambitious iPhone sales targets. The economy could also catch up with Apple. PCs and consumer electronics are not essentials when money gets tight.
Apple could have announced a share buy-back or created a dividend. Some critics would say that a "growth stock" is not an investment for yield investors. But for the time being Apple is not a growth stock. Giving loyal investors a little cash back would not have been such a bad idea.
Steve Jobs probably thinks he knows what is right for people who own stock in his company. Some investors are probably losing patience with that. Not everyone is a billionaire.
Douglas A. McIntyre is an editor at 247wallst.com.
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