So exactly why are Wall Street’s knickers in such a twist over Apple’s first quarter fiscal 2013 earnings reported yesterday?
Make no mistake—they are in a twist. The stock closed down $63.51 a share today. That’s a lot even for a $500 a share stock. The loss amounted to a drop of 12.4% for the day.
No year-to-year earnings growth in the quarter. Apple reported earnings for the quarter of $13.81. Although that was 26 cents a share better than the Wall Street consensus, it was still below the $14.03 a share the company reported in the first quarter of fiscal 2012 back in January 2012.
Lowered guidance for the second quarter of fiscal 2013. The company told Wall Street to expect revenue for the quarter of $41 billion to $43 billion against the $45.94 billion Wall Street consensus. Gross margin for the quarter would be 37.5% to 38.5% instead of the 40.5% Wall Street expects.
And most important of all, a lack of catalysts to make investors want to buy the stock.
Why do I call this “most important”? When a stock is as widely owned as Apple was (before the announcement,) a company needs to generate huge excitement to bring more money into the shares. Apple needed a Next Big Thing and instead what investors and analysts got was business as usual. Apple did sell a record 47.8 million iPhones in the quarter, but—ho hum—that was below recent analyst estimates of 48 million (which were indeed below estimates back in the fall of 50 million or 52 million.)
This lack of a Next Big Thing is indeed the common element in much of the analyst commentary today. Sure, the analyst reports worried about increased competition from Samsung and other makers of Android phones, or about supply chain shortages that cut into sales of Macintosh computers, or Apple’s failure to take more market share in China and India.
None of that would have mattered if Apple CEO Tim Cook had unleashed an Apple TV or something. Absent that, analysts were left with their worries and advice that just about begged Apple to behave like a regular company and sacrifice some of its extraordinary margins in order to build a cheaper phone or tablet so that the company could grab market share.
Absent either the Next Big Thing or Apple’s decision to become a regular company, many analysts said they can’t see Apple as a growth stock any more. The stock will start to climb again only after growth investors finish selling and value investors adopt the shares, more than one wrote.
Frankly, I think this is rubbish. The Wall Street consensus is now looking for Apple to grow earnings by 9.74% in the fiscal year that ends in September 2013. (And by 17.7% in the fiscal year that ends in September 2014.)
Which doesn’t make Apple a value stock. Apple remains what it was before this earnings announcement—an extraordinarily cheap growth stock. Before the news, when Apple sold at $514 a share, it traded at 11.6 times 12-month trailing earnings (for the four quarters that ended with the first quarter of fiscal 2013 reported yesterday.) After today’s slaughter, it traded at 10.1 times trailing 12-month earnings. Subtract out the roughly $145 in cash per share that the company had at the end of December ($137 billion in all) and you’re looking at price to earnings ratios of 8.1 pre-announcement and 7.1 after today’s decline. That’s cheap even if Apple is only going to grow earnings by 9.74% in fiscal 2013.
But I don’t think there’s any more reason to believe the analysts in today’s pessimism than in the optimism of three months ago. iPhone volumes climbed 29% year over year even though Apple just started selling phones in China and even though the iPhone 5 isn’t slam-dunk better than the newest Samsung models. In iPads Apple grew volumes by 48% year over year in the quarter and claimed 56% of market. Sure that share will erode, but remember the analysts who talked about the key Apple advantages of total control of the hardware/software experience and the huge and integrated app store? Well, they were right. Those are huge advantages and they didn’t vanish yesterday.
I think Apple the stock as opposed to Apple the company has had a problem for the last quarter—the stock was over-owned and without the excitement of the Next Big Thing—and the need for a Next Big Thing to be even bigger than the Last Big Thing—there was a scarcity of new money to flow into the stock when it hit $706 back in September.
The stock is 36.2% from that high. After four months of almost constant selling and at $450.50 instead of $706, I think it requires a lot less excitement to drive money into the stock.
But it will require some. Wall Street analysts are cutting ratings and target prices hand over fist and that does generate downward momentum on the stock. After four months of selling, investors are going to be understandably reluctant to jump in at $450 (after all they jumped in at $600 and $550 and $486) until they see some sign that they’re not attempting to catch a falling knife.
So, yes, I think Apple could drop further from here or wallow around at this level not going anywhere for a while until investors can see a catalyst.
What might a catalyst be? Apple could announce a big buyback program or another special dividend that would use up more of the on-shore cash in Apple’s vault. It could announce a number of big deals to increase the universe of wireless carriers that sell iPhones. (Apple still doesn’t sell iPhones through some of the biggest carriers in developing economies.) And third, it could announce a new iPhone and iPad and Macintosh refresh cycle that’s earlier than now expected.
I don’t see any of that happening tomorrow. May or June is likely. March is possible. But I don’t think any earlier.
So even if you believe that Apple’s business model isn’t broken and even if you believe that Apple’s competitive advantages haven’t all vanished almost overnight, you’ll need patience.
Back in September I put a target price of $760 on Apple in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . On the fundamentals I still don’t think that’s unreasonable. If Apple only grew earnings in fiscal 2013 by the 9.7% that analysts now project, at $760 Apple would trade at a price to earnings ratio of 15.6 at the end of 2013.
But investors trying to value Apple are looking at a much more skeptical universe than four months ago. Given that skepticism, I’d set a target of $600 by September. That would be 13.5 times projected earnings.
And $600 would be roughly a 33% gain from here.
That sounds good, right? But I think you’ll earn it for all the patience you’ll have to expend and all the sleep you’ll lose to volatility.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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