Posts Tagged ‘AAPL’

September 9 2014 is the biggest day in Apple’s history — the announcement of new iPhone 6, 6 Plus, Apple Pay, Apple Watch, iOS 8, iHealth apps, and many new features and apps. People even comments the Apple Watch is the next big thing after iPhone.   If you miss it, you can watch recap here – link.

2014-09-09 iphone 6 pic


3 Important Moments For Investors

As a professional investor, I bought Apple stocks multiple times when its post-stock-split price hovered about $57-$78 a share and sold it multiple times as well after each peak. What interests me most is the supply chain impact because of Apple’s products.

Investors usually “buy the rumors (hype) and sell the news (event)”. Ahead of the big event there are those who are flashing back 2012 when Apple shares sprinted higher ahead of the release of the original iPhone 5. Apple shares peaked on almost exactly the day of the release then collapsed by almost half over the next six months. Even today the market cap of Apple is lower than those heady days (though the stock price is higher… buybacks make up the difference).

This trading pattern manifests itself in these 3 important moments from Apple (1) new iPhone announcement, (2) iPhone pre-order number news, and (3) when we receive iPhone in our hands. On the last step, companies like iFixit would normally fly to Australia to get their hands on new iPhone, tear it down (disassemble) into pieces to check which suppliers are used in the new iPhone. Speculative investors would pay to get the first hand information.

2014-09-09 iFixit iphone 5s teardown

Nowadays, leaked information flows faster than ever, many reporters had shown and written about mobile payment, health, fitness app and Apple Watch a week or even months earlier than the new iPhone announcement.  For example, 3 days before the Sept 9th official announcement, Techcrunch reported (link) that China Telecom might violate the contract to put a iPhone 6 pre-order page on their website. I guess that’s why Apple pulled China out at the last minute from the list of countries in the first launch.

2014-09-09 AAPL China telecom leak


Winners in the Supply Chain

Apple continues to demonstrate its unparalleled control of product ecosystem. Apple launched the first payment truly leveraging its hardware (NFC + Fingerprint). This is really a negative news for Square, EBAY’s PAYPAL, and other mobile payments startups.

In terms of winners, iPhone 6′ 5.5-inch optical image stabilization comes from the Japanese listed company 6770.tyo (ALPS), NFC chips are NXP Semiconductors (NXP). Both are iPhone’s new suppliers.

The stealth winner is InvenSense (INVN) which provides all the tracking software, accelerometers and gyroscopes in the iPhone 6.  The market rumor started last year from iPhone 5S but INVN was excluded in the final time trial production. This year iPhone6 ​​and Apple Watch, iPad, iPad mini will at least boost a hundred million to the INVN new shipments. INVN is also a supplier to Samsung phones that use optical image stabilization. INVN successfully breakthroughs in several markets simultaneously.

Broadcom (BRCM) draws roughly 28% of their mobile revenue from selling Wi-Fi chips and touch controllers to Apple. High chance that Apple will switch from 802.11n chip to a little bit more expensive 802.11ac chip in iPhone 6. (yet to see at tear-down)

Apple’s “A-series” chips (application processors), baseband inside iPhone 5 is done by Samsung since 2012.  It’s addictive not to think that Apple will transition to Taiwan Semiconductor (TSM) for the manufacture of its application processors. Risk is that Samsung has more mature and advanced 14-nanometer manufacturing technology (i.e. thinner/smaller). If not, TSM will gain significant share with iPhone 6

GT Advanced (GTAT) disappointed many investors that it will only supply sapphire glass display for Apple Watch but not on the 5.5 inch iPhone 6. Its share price plunged 12% on Sept 9th. The drop attributes to the fact that Watch release date is postponed until next year. Initial shipment is expected around 3M to 5M for Watch in 2015 Q1.  Also, online heated debate between Corning’s Gorilla Glass vs. GTAT’s Sapphire Glass pined down the net benefits of using sapphire (link).  IMO, GTAT sell-off is overdone especially because Apple has already invested $500M in GTAT to build 200 furnaces to produce sapphire. Even though the Apple Watch initial shipment is small and delayed, GTAT should be a “hold” given that it is a major supplier of sapphire and the volume is expected to increase due to higher demand of Watch.


Apple Watch Creates New Ecosystem

2014-09-09 AAPL iWatch

The new Apple Watch platform, the new big data is many entrepreneurs’ paradise. Once again, Apple creates a new ecosystem.  It opens up lots of possibilities, a new entry to mobile data for app developers to explore new applications among social, personal location, and healthcare. For example, emergence of Apple Watch is very positive for search service provider such as Google, Baidu (search, maps), YELP, Twitter, public comment and apps based on mobile end personal location service provider. My only concern is the battery standby time.

Apple Watch is a real threat to many emerging wearable bracelet manufacturers and to many $ 400 or higher watches manufacturers. Apple Watch appeared to prove that the era of wearable smart devices coming true. The Watch also plays the role of industry standards. Apple has ecosystem advantage that will give a two-year lead time for Apple to beat Google and Samsung.


Should You Buy Apple Stock Now?

If you own Apple stocks, you should stick with AAPL despite a potential sell-on-the-news reaction.  iPhone 6 is a big jump from iPhone 5 with its new hardware and features. Optimism around the iPhone 6 is running high given Apple’s user loyalty and installed base of more than 300 million iPhones, which could drive a big upgrade cycle. The larger screen size may also help to regain lost market share to Android.

2014-09-09 AAPL stock chart

If history hold truth, Apple stock price peaked roughly on iPhone 5 debut in 2012 and fell in the next 6-9 months. 5S and 5C launch was perceived to be a disaster. However I believe this time is different. Both iPhone 6 and Watch are big game changers. Some believe that these may bring lots of would-be Samsung fans to switch to the newest and cool stuff on the earth.

What have announced at the launch event yesterday (Sept 9th) is tracking what we expected from the leaked information. So if you haven’t bought any Apple stock, it’s wise to wait until we see the pre-order number news. If there is a lot of surprises on the upside, Apple stock price will definitely move to a new high around $120 level. You can still make a good 5-10% profit by riding the tide from current closing price of $98 .


Bonus: Interesting Fact — iPhone 6’s Impact on China GDP

Economists predict that because of iPhone 6, China’s GDP will increase by 1% this year and Taiwan’s GDP will increase by 2%. Almost 30% of the parts inside an iPhone are sourced from Taiwan suppliers and shipped it to Foxconn assembly plants in China mainland. In terms of economic $ value created by iPhone for China is about US$6-7 (net of import/export) and in Taiwan, $24-28.

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Since Microsoft (MSFT) broke the news about its CEO replacement (Satya Nadella) around Jan 31st 2014, its share price enjoyed a ~18% rise from $34 a share to $40 as of March 21st. I am no better analyst than anyone to judge and value MSFT. But in my view, MSFT is getting way ahead of itself.    At this price level ($40 a share),  we have already priced in the hope (or illusion) that the new CEO would sail the giant cruise ship “direction-ally positive” in the future, ignorant of its past failed initiatives. In the following analysis, we find more downside risks than upside rewards owning MSFT at $40 a share. At the current price level, we could also find a few better alternative dividend-paying investments than MSFT.

2014-3-24 MSFT wants you to pay $100 for Office every year

Source: Microsoft

Goldman calls MSFT $29 a share

On Feb 24th, almost a month after Satya became CEO, Goldman Sachs reiterated a Sell rating on Microsoft with a price target of $29 a share.  Here’s an excerpt of its comments follow the report:

“We see MSFT’s price aggressive tactics as unsurprising as the company works to establish a more meaningful footprint in consumer compute. MSFT has been a laggard in tablets with 3% share in CY13, while the PC market has been in decline (-10% yoy in CY13 and -4% yoy in CY12), partly due to the rise of mobile computing. We note that both the PC and tablet categories are expected to see ongoing pricing pressure in the years to come, given changing demand dynamics and also new form factors.,” said analyst Heather Bellini.

“Ultimately, we see pressure to Windows pricing as presenting a challenge over time to MSFT’s overall gross margins for D&C Licensing (GSe: 91% in FY14, and contributing 28% of MSFT’s total gross profit) as price points on PCs and tablets continue to fall. We model total Microsoft gross margins of 69.6% in FY14 (Street: 69.7%) vs. 68.4% in FY15 (Street: 70.0%),” she added.

In a nutshell, Goldman thinks MSFT has not been able to turnaround and establish a significant market share in the mobile and cloud computing trends (since the beginning of iPhone and Amazon Web Services launches) while still facing huge price cutting pressure and declining revenue in the PC market.

Is Office iPad app a real killer to justify $40 a share?

Not surprisingly, many investors think bullishly about the Office iPad app launch reported on March 27th.  Office remains Microsoft’s biggest money-maker: Before changing up its reporting, Office has 1 billion users around the world. Last year, the company’s Business Division (dominated by Office) had FY13 op. income of $16.2B, well above the $9.5B produced by the Windows unit and the $8.2B produced by Server & Tools.  Both sales and profit grew 7% even though the latest version of Office was already two years old.

Source: Microsoft

The apps will require an Office 365 subscription, much like the Office iPhone and Android apps released last year. Since the release of those apps, Google has made its Quickoffice productivity suite free, and Apple has made its iWork suite free to buyers of new iDevices.

In a move viewed by some as a prelude to an iPad launch, Microsoft recently rolled out a Personal edition of Office 365 that goes for only $70/year, 30% less than Office Home Premium (supports up to 5 PCs). The real sales discounts to enterprise users would be much higher than 30%.  Basically MSFT needs to sacrifice profit margin to catch up with Apple and Google to gain market share in tablet and cloud computing market respectively.

Office and Windows OS made up 95% of the company stock price in 2012 and unfortunately this picture has changed in 2014.  The Trefis’ chart below shows the entice group of new products (search, phone, and games) are contributing less than 7% to the stock price.

Maybe MSFT would be worth $40 a share in 2016 however unless CEO Satya had a magic wand to build a new company without too much reliance on old product suite, I have doubt in any huge success in a year or two.

2014-3-24 Trefis MSFT product mix

Source: Trefis

The question is who is buying $100 a year subscription for Office 365 on iPad?

Office 2013 and Office 365 are a clear improvement over previous iterations. But there’s a larger question here about who Microsoft Office 2013 and Office 365 are really for.  For small businesses, it’s worth paying $1000 or more having all users on a standard, shared apps suite with free upgrade. However for simple tasks, online services like the very good (and very free) Google Docs work just fine.  For most of us, an existing copy of Microsoft Office — even one that’s years out of date — will also get the job done.  That means a growing number of Office customers are staying with the same version for five, six or even seven years, according to consultancy ITIC.  That doesn’t put money in MSFT’s pocket.

How about on the growing tablet market?   Well, how many of us need all the bells and whistles on a tablet — rich formatting options, plug-ins and cloud services, etc?  Not for the $140 price tag (for Office 2013’s most basic version) or $100 a year subscription fee (for Office 365) that Microsoft is charging.

MSFT hopes that subscription pricing will create more sticky, cheaper entry point and more predictable, fixed sales stream it can count on yearly. Well, this would be an upgrade most of us can afford to skip.

Should you book your gain for MSFT and invest in Apple?

I remember I studied MSFT case study in my MBA Value Investing class (probably a famous and commonly used case in many MBA schools).  Value investors were attracted to MSFT’s cash balance (~US$3B), about 4% dividend yield, and most importantly a “moat” which is its Windows OS and Microsoft Office software.   The case has been studies million times.   In a decade, MSFT share price never went up higher than $40,  a level it last saw in July 2000.   Therefore, crossing $40 is a big psychological win for lots of investors.  Question is always whether you shall value MSFT like a hi-growth technology stock or slow-growth dividend-paying traditional value stock?

2000-2014 MSFT stock performance

Wanted to leverage some findings and data points used in a Seekingalpha article to address the issues for declining yield, high R&D capex, and non-innovative product mix.

  • Declining Yield: MSFT’s technically trading at 15 P/E ratio, above its 5-year PE average at 13.18. Current dividend yield is declining from 4% range to 3% range. Even though Microsoft’s dividend growth so far has been impressive, other old tech names like Intel Corporation and Cisco Systems yield a lot more right now.
  • Ineffective  R&D Capex vs. Apple and Google: based on recent CNN article, Apple gets more bang for its R&D spend than most other companies do, in terms of sales increases. It’s easy to believe MSFT needs to spend lots of money creating innovation organically or via M&As in order to catch up with Apple and Google in both consumer and enterprise tablet and cloud computing market.
2014-3-24 MSFT spent way more than Apple in R&D

Source: CNN

  • Expensive to buy growth: MSFT’s PEG ratio (PE / growth) will be > 2.0, way higher than many of its peers.  If MSFT share price continues to rise in 40s, it’s hard to justify why you should invest in MSFT but not Apple.  I used data from Yahoo! Finance on March 24th to illustrate the comparison. 
    2014-3-24 MSFT comparsion to IBM AAPL INTC CSCO

*I don’t bring up Blackberry here as a comparison to MSFT because some people see Blackberry as a very risky bet.  But apparently both CEOs are selling turnaround stories. One is a first-time CEO (Satya Nadella) with lots of cash on hand, low risk to fail. Another is an experienced turnaround CEO (John Chen) who has limited time and cash to fight for survival. Probably it’s worth another blog post to compare and contrast. Who will have higher chance to surprise investors on the upside?

  • Over-Valuation: Today, Barron’s analyst Jack Hough exudes praise for Apple’s “hardware-as-a-service” business model, and thinks shares could rise 20% to $635, or 13.6x C2015E EPS, next year, given Microsoft currently goes for 14.4x C2014E EPS.  There is high chance that the price will go higher later at MSFT’s conference in San Francisco on 27th where CEO Satya will make his debut to talk about future strategy.  However to provide a market view for price target of MSFT, it’s though to convince value investors that $40 a share is very cheap buy-in.
    • 25 analysts on Yahoo Finance have an average price target of $38.84, 4% below the current share price.
    • 38 analysts on Marketwatch.com have an average price target of $39.4, 2% below the current share price.
    • Only Trefis.com has a price target above the market price and that too represents just a 5% upside.

Conclusion

As a value investor, Microsoft is still a great technology company to own with 2-3% dividend yield. A new CEO and iPad app brings a stream of hopes and optimism to pump the share price to historical high. How much imagination you could get from new CEO transformation story?  Instead of betting on any surprises to propel the share price higher, it makes more sense to look at MSFT’s fundamental and long history of slow to no growth. When there is high market euphoria on MSFT, it is easy to convince yourself you can better use your cash somewhere else.

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As of 2013 Aug 05, this is our current investments in our Accel Value Fund portfolio: AAPL, CNTF, FB, MHR, NQ, NOV, NTE.

We sold off CTEL after the $6/share special dividend was paid in Q1.

Current portfolio is heavily weighted towards mobile, oil/energy, and software/hi-tech.  10% of our cash is planned underway to invest in a company in the financial sector.

Recent catalysts for the holdings:

CNTF: On 2013-07-29. According to the Chinese reporter from Techweb, IDG Capital partner (Mr. Young Guo) said there is an unnamed company approached the TechFaith CEO/Founder for US$200M acquisition for the future potential of its mobile games & motion-tracking technology unit growing into 1.5 million users of console & gateway to SmartTV/Home Media market. Based on $200M offer, each CNTF share is estimated at $3.77 (ADS). Guo said talk is still being held to negotiate a higher but reasonable price.

Source: http://mi.techweb.com.cn/tmt/2013-07-29/1313084.shtml (in Chinese)

NTE: 2013-08-05, Q2 Earning release. I expect it will deliver on-par (similar to Q1) or lower revenue and profit due to inconsistent or canceled smart devices’ LCD order from direct customers (e.g. Sharp and JCT).

 

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Apple to announce plans for its $100 billion cash reserves tomorrow morning (March 19th 2012).  Rumor says that it MAY include special dividend payout.

Here’s link on Engadget link:  “A slew of successful, high margin products have left Apple sitting on an almost unimaginable amount of money — $97 billion as of its last earnings report — and led to the natural question of just what to do with it. According to a press release just issued, we’ll all find out about “the outcome of the Company’s discussions” tomorrow on a conference call with CEO Tim Cook and CFO Peter Oppenheimer at 9AM ET. What does $100 billion or so of iMac, Macbook, iPhone and iPad money buy? Speculation has already included dividends for investors, a spending spree of acquisitions or even a dip into philanthropy. ….. what do you think the folks in Cupertino will (or should) announce?”  

My opinions:

– special dividend is bad idea since it will temporarily drive up the stock price and make it more risky to bound back 5-10%. Fundamentally, it won’t help boost or sustain the revenue growth in long term. Instead, share price will fall back after ex-dividend date and  increase in the speculative short options

– how about annual fixed dividend yield? guess it’d be good idea to maintain, support, and extend the hope for higher valuation

– putting the cash in a non-profit foundation is good social-marketing but won’t appeal to most institutional investors to buy more of AAPL

– setting aside money to acquire expensive content although makes most sense to me it was mentioned in previous earning call that it is NOT the focus at least for Apple this year

– maybe setting aside money for special M&A in new market area, like Social and Search?

– valuation: with latest Qtr EPS = $35.11/share, growing at 20% per year in the next 10 years, Apple’s share is valued at $1000/share; if 15% EPS growth –> $718/share; if 13%–> $626/share; 10% –> $519/share. Then, you should ask how many company can maintain above 10% growth for 10 years in a row?  Perhaps, Apple is the only one in the world can do it.

who knows which one or combinations are best for future?

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I’ve been very occupied with several vacation trips and family/friends visiting in town, therefore, you have not seen any new postings for past 2 months.  In the coming period, I will try to post at least 2 articles and researhes every month. Hope you can stay with us and re-visit this blog monthly.  Many thanks, Vincent.

If you are still one of the Apple (AAPL) shareholders, you probably heard about several equity analysts say that Apple can reach a target price in the $330-$350 range in the next 12 months.  On May 26,  Apple also overtook Microsoft Corp. (MSFT) to become the most valuable technology company on optimism it can keep adding customers for its iPhone, Macintosh computer and iPad. Apple’s market value is $222.1 billion vs. Microsoft $219.2 billion.   Do you feel excited or feel upset since you’ve already sold off your AAPL shares?

However, back in June 17th, a technical trend hedge fund (BAM) predicts Apple stock price to drop back under $100 towards early 2011 (click here to read the article). I am also shocked by this prediction but with the recent iPhone 4 antenna issue and delay of white-colored model of iPhone 4, some analysts say that the future $350 level would be a bubble and investors are trading on high hopes of continuous 50% revenue growth in the next 5 years.  It’s funny to quote Steve Jobs’ response to the antenna problem in the recent news conference:

“We’re not perfect,” Jobs said at a news conference. “Phones aren’t perfect.”

Bull talk: Let me point out couple key statistics to support both bullish and bearish claims on Apple. First, let’s see if the simple P/E test can hold water for the bullish view. Historically, Apple’s trailing P/E is 38, while its forward P/E is 30. Current P/E level of 19.5 is relatively cheap in the era of Steve Jobs and it implies a potential 30-40% upside on share price. What should Apple stock be priced at according to its historical P/E norms? Based on expected earnings per share of only $11.70 in fiscal 2010 (many think earnings per share according to the new accounting standard will end up closer to $13) the stock should be priced at $263 today and should reach $376 by September 30, 2010. These prices do not reflect great years for Apple, they simply reflect the averages. That’s why $350 target price is not a dream.

With $42 billion cash sitting on Apple’s balance sheet, I predict that they will either return the cash to shareholders as dividend or share buy-back. Either way, shareholders will benefit from increase in EPS and share price eventually. You should be convinced by the fact that their quarterly earning has beaten Wall Street analysts estimates for past consecutive quarters.

On the other hand, Apple has dominated and been leading the smartphone market with >70% market share in U.S. (26% in the world). All the new mobile applications have been started and profitable on Apple’s app store. In addition, given the Verizon’s new contract, overseas popularity and store expansion in Asia (China, Korea, Japan, India, etc.), it’s logical for us to believe that Apple can maintain its revenue growth (at least from the volume growth) in the next 3 years.

Bear talk: On the contrary,  if you look closer to the cost structure iPad and iPhone 4, the gross margin has dropped from historical average 36% to 33% and it’s expected to slide further south due to costs of chips and materials manufacturing new iPhone 4.  According to Apple’s CFO, Peter Oppenheimer, he expects company’s overall gross margin to drop from 41.7% to 35% in the Q4. Given Apple’s aggressive pricing, margins would be affected in the future.

Giving away the free bumper cases to resolve the antenna problems would also increase the expenses and postpone iPhone sales recognition. More importantly, Apple had been selling the cases for $29 with cost at t$3, this free cases implies a huge margin squeeze. Not only is Apple is missing out on the extra profitability, it has to recognize the bumper costs as an expense in the next two quarters. But please note that this is hopefully a one-time charge, Apple will not have similar problem in next year’s new iPhone model.

One last bear talk is the health problem of Steve Jobs. Well, it’s too speculative to predict how long he can live.  I wouldn’t consider it in my investing decision.

Conclusion: All being said, fundamentally I do feel there’s lots of upside potential for Apple to continue to carry the steam to 2011. Rising to $350 is possible in my view.  However, I would not recommend buying Apple at the current price $26x to long for any short-term profits within 2010.  I would probably wait until it’s about $240 or below its 50-day trend line, especially due to the lingering high unemployment rate and slowing-down housing market in Q3 and Q4.

At this moment, instead of Apple, I would suggest you to look for other better investment opportunities — companies as great as Apple but very much undervalued with ~ 40% upside in near term. Which are they? I will discuss those in my next few postings.

Disclaimer: I don’t hold any AAPL.

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