AAPL Disappointing Earnings, Stock Price Going to $268?

Posted on Jan 29 2013 - 9:15am by George

AAPL price projection
If you are a believer of half-baked technical analysis, then you should load up on AAPL puts and ride another 40% slide on the AAPL stock price to $268.

Lets Recap.

AAPL 2012 4Q Earnings Report: A Bust

Apple announced disappointing earnings results last week.  The main driver for the decline in stock price appears to be the investors’ disappointment in gross margins and the iPhone sales.

The interesting part is that AAPL lost about $50 billion in market capitalization after the earnings report.  To put the losses in perspective, the one day loss in market cap is equivalent to the market cap of enterprise giants such as Nike ($48.5b), Target ($40.5b), and Starbucks ($41.5b).

Gross Margin

The explosive growth trend appears to be the thing of the past, and investors are jumping ship.  Lower margins means loss in competitive edge and perhaps its label as a premium brand.  For the first time in eight quarters, the gross margins dipped under 40%, and the company guided the gross at around 37.5%-38.5% range for the next quarter.

Period Gross Margin
Q1 2011 41.42%
Q2 2011 41.73%
Q3 2011 40.25%
Q4 2011 44.68%
Q1 2012 47.37%
Q2 2012 42.81%
Q3 2012 40.04%
Q4 2012 38.63%
*Q1 2013 (Guidance) 37.5%-38.5%

iPhone Sales

iPhone sales number was also a sticking point for the investors.  The street expected to see 48 million to 50 million units sold last quarter.  Basically, if the sales number did not have a “5” in front of it, the stock was doomed for this earnings period, and they ended with 47.8 million units shipped.  iPad sales also came in about one million unit light at 22.9 million units shipped vs about 24 million concensus estimate.

Despite the blowout numbers, the Street always has the mentality of “what have you done for me lately.”  The traders are not happy about missing estimates and guiding future sales and margin lower.

So where does AAPL stock price go from here?

Back to the Future

MSFT DotCom Bust
Lets rewind back 15 years and take a look at the story of Microsoft at its peak in the tech boom era.  Microsoft was already an established company in the early 1990s, but they had not blown their competition out of the water just yet.  They were still the forward-thinking innovators of the future in the tech space, they had the blueprint to advance technology like we had never seen before.

Operating System

Windows 95 put a choke hold on the operating system market share, it slowly blew away competitors such as the Mac OS.  The genius of Bill Gates made Windows available for install on most computers, as long as the user owned the licensed software, where as Macintosh OS was only limited to the Mac computers.  By the time Windows 98 rolled around, Microsoft essentially had a monopoly in the operating system market.

Browser

Remember the days when “Netscape Navigator vs Internet Explorer” was actually a relevant conversation in the mid 1990s?  Microsoft ended up bundling Internet Explorer as a basic feature in the updated Windows 95 Plus Pack.  With every Windows OS software sold meant a new I.E. user in the browser war, and eventually leading the way for Microsoft to dominate the browser market, then which led the rise of the internet boom.

Microsoft Office

Microsoft Office 97 was the major breakthrough that crushed all its competitors.  By dominating the operating system and the office suites markets, Microsoft became that 800 pound gorilla, had all the competitors crying foul and filing grievances about Microsoft operating their business as a monopoly.

DotCom Bubble Burst

Despite all the success, MSFT stock peaked at the end of 1999, along with the rest of the high-flying tech stocks such as Cisco, Pets.com and Amazon.com.  Between the high multiples that the investors were buying into and the legal troubles with the Department of Justice for the Antitrust civil action lawsuit, MSFT stock fell for 359 days.  From the peak on Dec 27, 1999 to Dec 20, 2000, MSFT fell 65% from $119.12 to $41.50.

AAPL the next MSFT?

MSFT vs AAPL
Steve Jobs was the greatest inventor of his time. He revolutionized the way people listened to music with the iPod and combined it with iTunes, which finally solved the mp3 privacy issue. Jobs was then able to streamline the iPod, PDA, and cell phone into one smartphone device.   The iPad was just the icing on the cake that people expected Jobs to launch, and it was a smashing success.

Much like the way Bill Gates revolutionized the PC industry, everything Jobs touched turned into gold.  Investors jumped on board and pushed the stock from under $100 to over $700 in less than four years.  Even when AAPL took over Exxon Mobil as the largest company in the world, AAPL analysts continued to raise their target price to well past $1,000.

Then came the margins and growth issue.

Path to $268 For AAPL

127 days into the current down trend, AAPL has dropped 36% since the peak of $702.  At the similar point, 127 days into MSFT’s 359 day down trend, MSFT lost 41% of it value.  That’s a difference of about 5%, both going in the same downward trajectory.  From that 127th day to the trough of MSFT’s DotCom losing streak, MSFT lost 40.6% for the following 232 days, from $70 to $42.  If AAPL stock follows the same technical trend, we will be look at a $268 AAPL stock by the end of this year.

AAPL has to have hit bottom by now right?  Think again.

  • Is it conceivable Apple continues to see headwinds in its margins problem for the next three quarters?  Their lawsuits to take out their competitors mostly ended with settlements.  The competitors are still thriving.
  • Is it conceivable Android OS, Blackerry 10, Windows Mobile continue to take market share from Apple?  Apple is charging higher premiums for comparable (and some inferior) products.
    • Nexus 10 can be had for $399 (WiFi only, 16GB) versus the latest iPad that is going for $499 (Wifi only, 16GB).  And here’s the kicker, Geekbench, which reports clock speed for the CPU, tested the Nexus 10 to a score of 2433, and iPad only scored 1775.  We are talking about better performance for a cheaper price from Apple’s competitor.
    • What about Samsung Galaxy S3 versus the iPhone 5?  The two are comparable models with arguably similar performance and speed.  But the premium pricing for Apple will eventually catch up to them, and that is the margins problem for them.  Check out the pricing compare:
      Storage (GB) Apple iPhone 5 Samsung Galaxy S3
      Verizon 16  199.99 [easyazon-link asin=”B008HTJMY6″ locale=”us”]69.99[/easyazon-link]
      32  299.99  [easyazon-link asin=”B008HTJKI4″ locale=”us”]199.99[/easyazon-link]
      64  399.99
      AT&T 16  199.99  [easyazon-link asin=”B00891PTQM” locale=”us”]99.99[/easyazon-link]
      32  299.99  199.99
      64  399.99
      Sprint 16 199.99  [easyazon-link asin=”B0097MVKW4″ locale=”us”]0.01[/easyazon-link]
      32  299.99  [easyazon-link asin=”B008ZPFHZK” locale=”us”]149.99[/easyazon-link]
  • Is it conceivable we truly have another tech bubble that is at the cusp of bursting?  Take a look at these examples:
    • Priceline returned +34.9% over the past 52 weeks
    • Amazon returned +43.3% in the past 52 weeks
    • Facebook gained about 84% in the past four months
    • even Netflix, who was left for dead just two quarters ago, has since risen by almost 230% over the last five months.

Has AAPL Hit Bottom?

Truth is Apple actually posted record sales and profits at $54.5 billion and $13.1 billion, respectively. The company’s cash on hand increased to a whopping $137 billion, most of which are invested in their own hedge fund Braeburn Capital, so the cash could conceivably be growing, conservatively, at 3% to 5%.

Apple can also be proactive and start working with the shareholders.  Apple can start putting the $137 billion cash to work, either paying out special dividends back to its shareholders or buying back a large chunk of its float shares if they deem the current price attractive.   If Apple decides to payout special dividends, the stock could become attractive to several funds very quickly.

Another logical move for Apple is to lock up a contract with China Mobile.  With 700 million subscribers, and combine that with the Chinese’s affinity toward American products, the deal could become very profitable.

What do you think?  Is AAPL heading for $268 or $702?

Full disclosure, I own AAPL stock through my mutual fund, so by no means am I bashing the stock or influencing public sentiment on this stock.

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  • Waswoo

    Stick to the technicals on AAPL. You don’t have a clue about fundamentals. Fortunately for you and all other “tech-kittys” out there, fundamentals like PE/PEG, competitive position, etc, etc that they teach in those oh-so-useless university business schools, just don’t matter anymore.

    Between the tech-kitty day traders, and the hedge fund algorithms programmed by undergrad math majors armed with a B+ in Course 220: Partial differential equations for undergrads, what could possibly stop AAPL from going to $268, heck maybe it goes to -$268. What’s that you say, can’t happen? Check your code Einstein. That math major you hired failed his class on C++ programming.