Apple: The Golden Opportunity?

Apple $AAPL, in my opinion one of the world’s most controversial stocks. People seem to be on both sides of the story, either you’re a bull, or either you’re a bear. If you don’t have an opinion yet, hopefully this article helps you form one.

If you remember, Apple slipped from its all-time high on September 21 2012 at $ 705.07 to a low of $ 423 on April 5th 2013. At that point, I had lost all confidence in the stock. I couldn’t believe such an iconic American company like Apple could shed more than 40% in less than 7 months. The problem was, the stock was praised from the top to the bottom. I would always see analysts on CNBC saying that ‘this’ was the time to buy. From 705 to 423, it was all the same. After all this I’ve lost trust in those analysts and tend to try to analyze stocks myself.

http://finance.yahoo.com/echarts?s=AAPL+Interactive#symbol=AAPL;range=1d

There isn’t much need for introduction to Apple, so I will skip that. Wednesday was Apple’s Q2 earnings report release. For that again, opinions were mixed, I was on the bearish side. I expected a slowdown in iPhone sales as well as lower gross margins as a consequence of lower revenue and rising costs. For that reason I bought myself some put options on the stock. On the other hand though, Apple earnings beat analyst forecasts and showed that the company could get back on track. Wednesday, the stock did finish the stock did finish a bit lower and I managed to exercise my options.

The problem about the earnings report that people ignore, is that the expectations were low to start with. For a long time, Apple has been putting low guidance on its earnings report, that way it easily beat the expectations nearly all the time. I actually found this out while writing the article but, during an earnings call in December, the CFO of Apple said that from now on, they would issue guidance which and I quote, ‘reflects our belief of what we’re likely to achieve’. Essentially saying that they would make sure that they would make it hard to tell whether they would beat or miss expectations. For that reason, analysts started making their expectations higher on more ‘fair’.

Let’s try to decode the bones and flesh of the earnings report and talk about what they mean for the company moving on forward. Like I said earlier, I was expecting lower gross margins, this indeed happened. Gross margins dropped to 37.5%, this number was 10% higher just the last month of last year. Last year the gross margins stood at 47.4%, this is obviously very bad for the company and is also especially eyed by Wall Street as higher gross margins mean much higher profits for the company. The company did admit that much of this came from higher demand for products which are sold closer to the cost of manufacturing them, like for example the iPad mini.

Another important thing was the guidance. In its earnings report, Apple had a weak outlook for its sales in June. It estimated that it would report revenue between $33.5 and 35.5 billion dollars, with a still declining gross margin of 36% to 37%. Unfortunately, I don’t have any good news to cover the hard truth. Apple is not expected to release anything before June. It is having its WWDC conference where it unveils new products before releasing them. The conference will be held between the 10th and the 14th of June. The impact of those products released will only be shown in the Q4 earnings report.

Let’s move to the something that has been widely talked about in the investing community. For much time now, some analysts have been saying that they think that Apple has turned from a growth to value stock. Although I think this is true, I would like to add a few things. It is said that the first quarter or two are the toughest ones from a profit perspective. Therefore it was obvious that if Apple had released as many products as they did, it would be followed by a margin hit. Compared to its competitors, Apple is very cheap, which currently has a PE of less than 10 times earnings. Compare this to a company like Google $GOOG, which it’s PE is more than 22. This is more than double the Price to Earnings ratio, from a value standpoint; Apple looks much better than Google.

The thing with Apple is that so many funds used to and still own it. The funds range from mutual funds to 401Ks to hedge funds. Once those funds start to see a bit of weakness, their first instinct is to sell. This is mainly the case with mutual funds and 401Ks, where they try to cut their risk as much as they can. That is what you saw in the downfall. But once the stock springs back, investors will rush back into the name. The thing is actually getting the company innovating again. I do think that Apple is currently a value play, but I do see the possibility in the long term, of the stock returning to a major growth stock.

http://gadgets.ndtv.com/mobiles/news/analyst-predicts-apples-2013-product-lineup-includes-new-ipad-mini-iphone-5s-318869

I found this great diagram showing the product refresh cycle and what it will offer. As you can see, many products will be released in the 3rd quarter, which will consequently only affect the 4th. The most important thing to watch will be the iPhone and the iPads. Not the iPads in general, but mainly the iPad mini. The main attraction to the iPad minis will be the retina screens. Many people have been holding off from buying the current generation as they do not like the screens and feel like its old technology. This was a great move on Apple’s behalf. By not producing the iPad mini 1 with a retina screen, they created anticipation for the next one. The retina screen is so beautiful, that current ipad owners will be attracted to the new ones.

The other obvious thing to watch will be the iPhone 5S. There has been a lot of speculation surrounding this phone. Mainly focusing on personalization. Sources have reported that they might come out with different color versions and much higher storage. In my opinion, this won’t drastically affect the balance sheets as after all, not many people are after such a level of personalization.

There has been an awful amount of speculation on something that could affect the company on a much wider scale. This product is the creation of a low-cost iphone. If this were the case, investors should be jumping up and down. The creation of such phone would mean the re-surfacing of Apple and put it back on top. With the iPhone, Apple has attracted many customers. But the problem with the iphone is that it’s still too expensive. They have left a huge part of the consumers untouched. Those consumers are looking for cheap and good quality phones. That’s one of the big reasons why Samsung has been so successful in attracting customers. They offer phones for every sized wallet. Therefore if Apple were to actually create these low cost iphones, they would shine again.

Unfortunately, until the Q4 earnings report, I don’t see any major news to shake the stock and push it towards the upside. I can see it slowly moving towards the upside, but nothing to write home about. What would make me change my opinion would be the creation of those low cost iphones I mentioned earlier. In conclusion, Apple is definitely a name I want to be in. The true question to me is actually when to get in. I will be waiting for that decisive moment on when to pull the trigger, and once it happens, its off to the races.