{ OK, traders, now you know why some like me are in this for the longer term, I admire your ‘guts’ and brains, but I’m just built more for the fundamentals than the TA rollercoaster rides.
Disclosure: LONG with 5000shrs and sick to death over the utter lack of understanding of this on WS. }
Why has the impact of 3G iPhone sales been nonexistent on Apple (AAPL) stock? Because investors are flunking their Apple math exam. The iPhone story grows larger by the day, we are now on day 18 of iPhone mania. Tuesday morning the Santa Monica Apple store had a 2 hour wait by 8:30 a.m. If one million phones sold in the first three days was impressive, then what we’ve witnessed since then is even more impressive.
It’s time for a quick discourse on Apple math. Those, like CNBC’s Jim Cramer, who believe this has turned into an event driven stock are completely wrong. It’s all about the fundamentals. The lackluster response to unprecedented iPhone demand represents the greatest buying opportunity on Wall Street. Apple math sacrifices a big payday today for an even larger payday tomorrow. There are two components of Apple math creating this buying opportunity:
1.Those who don’t understand Apple math look at the recent earnings report and see a meager $419 million of iPhone revenue. This short term dilution of earnings power, caused by the 24-month deferred subscription accounting, has caused investors to ignorantly ignore the long term iPhone impact on earnings per share.
To foresee the real power of Apple math let’s fast forward to the December 2009 quarter when it’s estimated there will be 58 million iPhones reporting approximately $71.75 per phone per quarter (lonepeakportfolios.com). These numbers produce a profit of $2.5B from $4.16B in revenue for just a single quarter. Compare that to the current Q2 net income of $1.07B on revenue of 7.46B for the entire company! Investors are in store for a 1,000% increase in reported revenue from the iPhone over the next 18 months.
Apple math creates a rolling snowball effect that produces larger and larger returns while at the same time eliminating short term earnings volatility. By June 2009, earnings from the iPhone will reach current net income for Macs, iPods, Apple TV, software and iTunes combined. That is only 10 months away. This growth is happening right before our eyes but most are missing it because they fail to see the future ramp manipulated by Apple math. Apple hasn’t reported any revenue from the iPhone since the beginning of March. It’s coming.
2. The second component of Apple math that investors have incorrectly interpreted is the pending reduction in gross margins down to 30% in 2009. The incorrect assumption is that the margin erosion will reduce profits. Not so.
According to CEO Steve Jobs, Apple is in the midst of experiencing a market share tipping point with the Mac Computer. Spurred on by the complete failure of Microsoft Vista, Apple has a once in a lifetime opportunity to crack the market share dominance of not only Microsoft (MSFT) but also of their hardware competitors Hewlett Packard (HPQ) and Dell (DELL). The new Apple is all about market share. By lowering the price of their products, Apple stands to further capitalize on the iPod/iPhone halo effect that has led to market share growth 300% better than the overall PC growth rate (IDC data).
This pending drop in margin has nothing to do with a slowing economy; Apple has already proven itself with 41% year over year Mac growth in these tough conditions. The margin decrease has everything to do with their mass market share opportunity. Premium priced products won’t topple Microsoft. Apple math means lower margins produce market share madness.
Apple investors should not mistake local cloud cover to be permanent darkness. The future will eventually arrive and reward those investors who understand Apple math. Buying in-the-money January 2010 calls allows you to be out in front of any short term market weakness. Investors won’t ignore iPhone sales forever.
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“TanToday”]{ OK, traders, now you know why some like me are in this for the longer term, I admire your ‘guts’ and brains, but I’m just built more for the fundamentals than the TA rollercoaster rides.
Disclosure: LONG with 5000shrs and sick to death over the utter lack of understanding of this on WS. }
Tan - Do you really believe that WS doesn’t understand AAPL but somehow the people on SA and TMO/AFB do? Of course WS understands AAPL. So the answer to the question “why is AAPL trading in its current range?” must be found elsewhere.
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“chartguy69”][quote author=“TanToday”]{ OK, traders, now you know why some like me are in this for the longer term, I admire your ‘guts’ and brains, but I’m just built more for the fundamentals than the TA rollercoaster rides.
Disclosure: LONG with 5000shrs and sick to death over the utter lack of understanding of this on WS. }
Tan - Do you really believe that WS doesn’t understand AAPL but somehow the people on SA and TMO/AFB do? Of course WS understands AAPL. So the answer to the question “why is AAPL trading in its current range?” must be found elsewhere.
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“chartguy69”]
Tan - Do you really believe that WS doesn’t understand AAPL but somehow the people on SA and TMO/AFB do? Of course WS understands AAPL. So the answer to the question “why is AAPL trading in its current range?” must be found elsewhere.
In all honesty, I don’t.
One can surmise that the street isn’t more UP ON THINGS than the analysts that cover the stock, and reading them, the confusion and lack of insight into these matters is quite apparent.
I would expect that the funds, who are major buyers WOULD but where is the volume and pricing to indicate that they have keyed into this and are acquiring for the intermediate quarters?
I have spent hours a day on this site, watching the dailies and discussions, so I’m not totally clueless about the machinations of the shorts and naked sellers. And I understand the manipulation going on for the churn profits. But I would have expected the longer term hands to use these swings for accumulation, with a slowly rising uptrend SOMEWHAT INDICATIVE of these facts as laid out in the article.
Have the shorts become so dominant that they now ARE the markets? Are INVESTORS now totally irrelevant to the movement of APPL and the only course is a timeframe of a few hours at best?
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“TanToday”]Have the shorts become so dominant that they now ARE the markets? Are INVESTORS now totally irrelevant to the movement of APPL and the only course is a timeframe of a few hours at best?
When 5% of the investment community controls 70% of the trading activity, and they’re shorting, then yes - the shorts ARE the market. Investors are always irrelevant in markets like these - they’re controlled by hedge funds throwing around vast pools of capital. Its like being a human in Land of the Giants - in the middle of a fight. The best you can hope to do is dodge the falling boulders they’re throwing at each other until they stop being pissy and go away to pick on someone else.
Tan - Do you really believe that WS doesn’t understand AAPL but somehow the people on SA and TMO/AFB do? Of course WS understands AAPL. So the answer to the question “why is AAPL trading in its current range?” must be found elsewhere.
In all honesty, I don’t. Have the shorts become so dominant that they now ARE the markets? Are INVESTORS now totally irrelevant to the movement of APPL and the only course is a timeframe of a few hours at best?
Tan: Decades of research proves that enough of the market understands these type of financial facts that the market properly reflects this information in the stock price. So the poor performance of AAPL stock is most certainly explained elsewhere.
And the explanation is simply the laws of supply and demand. What I have found so surprising over the last 5 years of watching AAPL stock is how inelastic the demand is. When fear is predominant, a widening gap between stock price and equity value does not incentivize enough additional demand to readjust the stock price upwards. Sometimes the fear is Apple specific, and sometimes the fear relates to the general economy. Its hard to parse this fear most of the time anyway.
It can change overnight, but right now, fear is predominant. So Apple could lose another 10 points and there still wouldn’t be enough buyers to shore up the price.
A lot of people here blame it on the shorts, but it is the environment of fear that allows the shorts to play their games.
Greed will overcome fear at some point, as it ALWAYS does. When that happens, the reverse effect will occur: Apple stock price will skyrocket to bridge the gap, and probably overshoot it.
All of us who understand that there is a large gap now between equity value and stock price can profit from it, IF we have the requisite patience.
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“macorange”]
All of us who understand that there is a large gap now between equity value and stock price can profit from it, IF we have the requisite patience.
Well, I have my 800k in fully paid for shares riding…and my timeframe was always about 2-3 yrs out. So, eventually if the goofs running things in the world don’t totally screw the pooch, this “should” { I know, should doesn’t count } pan out and be worth the angst.
Started buying around 70ish, so I’ve seen some wild times indeed that didn’t make much sense. I guess this is just more of the same.
Re: Worth a New Topic: -> Apple Math: Market Share &
[quote author=“TanToday”]{ OK, traders, now you know why some like me are in this for the longer term, I admire your ‘guts’ and brains, but I’m just built more for the fundamentals than the TA rollercoaster rides.
Disclosure: LONG with 5000shrs and sick to death over the utter lack of understanding of this on WS. }
The reason we’re not bidding AAPL up is because we do not have confidence in Apple’s sort term strategy because we don’t know what it is combined with better places to put money to work this week.
We understand the Mac story. We get that for every percent in market share Apple gains around 2B in revenue. We get that Apple looks like it is about to go for a land-grab sacrificing higher margins for volume. We also understand that 50M iPhones sold is about $0.21 per quarter in additional revenue. As such, Apple has a high hurdle to get 50 million iPhones out into the world by the end of 2009 and even then we’ll not be super-impressed unless the Mac story continues its song. We get that iPod sales are flattening and hope Apple will release something new in the iPod range and not more of the same. We get that the mobil internet dream of the late nineties is becoming a reality in the later portion of this millennium’s first decade.
What we don’t fully understand is Apple’s accounting which forces us to make too many assumptions to build a strong bullish story. Too many assumptions in the context of sideways market mean risk. Risk scares me and the financials are romper-room for traders right now because broker dealers are protected. When that sector breaks down, I’ll gleefully come back.
With five thousand shares you can have fun with Apple options strategies. Here is a link to some common strategies.
This is the best analysis of the subject I have read, anywhere. This guy’s analysis is a must-read. It may not be ?ber-bullish, but it does the math brilliantly and puts most other missives on the matter to shame - including most of Wall Street’s “finest” analysts.
Apple: Are Investors Overlooking Cash Earnings?
posted on: July 30, 2008 | about stocks: AAPL
Apple Inc (AAPL) currently at $156.63: I believe investors have become overly fixated on Apple?s expected accounting income, while ignoring Apple?s impressive free cash flow generating ability. Free cash flow, not earnings reported in the accounting statements, determines the true value of a firm. AAPL?s high margins, coupled with minimal capital investment needs, enables it to produce robust free cash flow. Another issue is the iPhone accounting treatment, which conceals the true magnitude of its cash generation. According to my estimations, the 3G model?s cash flow per unit is higher than its predecessor. In addition, Apple receives these cash flows much sooner compared to the old model. Not only will Apple sell many more 3G models, the per-unit impact on cash earnings will be much greater. Therefore, when shifting focus to cash earnings, as opposed to accounting earnings, AAPL looks attractive at current levels.
Earnings Expectations: At the Q3 earnings call, Apple guided well below expectations for Q4, and gave a weak gross margin forecast for FY09. Shares took a hit and prompted Wall Street analysts to reduce their 4Q08 and FY09 estimates. Consensus estimates for FY08 & FY09 are $5.20 & $6.05, respectively. Early this year, the FY09 estimate was ~$6.50, then drifted lower to ~ $6.35 where it hovered for several months. Since Apple announced its margin guidance, the consensus FY09 EPS estimate has plunged to $6.05.
Apple shares currently trade @ 27x FY09 EPS, with expected annual growth of 16%. A 27x multiple for 16% growth isn?t exactly cheap. However, evaluating Apple on an EPS-multiple basis is misleading due to Apple?s iPhone accounting treatment. Considering Apple?s cash flow/share, the stock looks attractive.
Wall Street estimates are for accounting income—what Apple is expected to report, not what Apple will actually earn. Cash flow is the true metric that matters, not accounting earnings. Accounting earnings are a product of a firm?s finance department, and cash earnings are a product of customer behavior. Thus, one shouldn?t place too much emphasis on accounting income and quarterly estimates.
The amount of cash flow available for distribution to owners determines intrinsic value. Accounting income and cash flow are not the same, and often accounting income is a poor proxy for distributable income, hence intrinsic equity value.
Evolution of Market Expectations: The 3G iPhone developments—new markets, new revenue model, lower price points, and new features, etc—didn?t seem to affect AAPL shares much. However, concerns over Steve Jobs?s health and guidance have pressured shares. iPhone demand has been relentless since the launch as stores struggle to keep supplied. Analysts have raised their forecasts for unit sales, yet earnings estimates have only changed slightly (before CC).
Earlier this year, investors and analysts were questioning whether Apple would achieve its stated sales goal of 10 million units in CY08. Some began to think the iPhone was going to turn out to be a disappointment, and that expectations were certainly excessive. However, iPhone sales projections rose significantly with the June announcement. Many analysts raised estimates to more than 20 million for 2009. Yet, there was then the question of reduced profitability due to the reduced price points. Originally, the thinking was that volume could certainly expand but the effect on the bottom line would be subdued due to shrinking margins. Yet, it was soon agreed that margins won?t be significantly impacted due to the larger-that-originally expected subsidy payment. Instead of receiving a cut of monthly carrier payments over 24 months, Apple will receive an upfront lump-sum payment that is likely equivalent.
So, we have a massive increase for iPhone sales expectations with profitability remaining somewhat intact, yet AAPL shares react moderately and analysts only revise estimates slightly higher. Ostensibly, earnings estimates didn?t change significantly due to the iPhone accounting treatment that spreads revenue over 24 months. Thus, iPhone sales won?t really impact the income statement until a much higher run-rate persists for many quarters so that revenue recognition has had time to catch-up.
Shares reacted little to the June announcement, until somebody pointed out that Jobs looked unhealthy, causing the stock to tank. Shares later recovered only to get slammed again after the Q3 earnings call when management refused to elaborate on Job?s health condition. Panic over Jobs’ health has abated, but concerns regarding Apple?s gross margin guidance and susceptibility to a weakened consumer still linger.
3G Produces More Cash Flow & Sooner: The transition from shared payments from carriers to an upfront subsidy payment increases Apple?s intrinsic value.
Apple’s cash flow will increase from receiving an upfront, one-time payment opposed to recurring monthly payments. Originally, when an iPhone was sold, Apple only received cash associated with the handset sale, revenue which probably averaged around $430-$440. Apple then would receive $15/mo (guesstimate) for the next 24 months, $360 in total payments, or PV of $319 @ 12% discount rate. Present value of total CF is ~$750/unit, However, this isn?t a very realistic assumption to model. Actual revenue/unit is significantly less due to several reasons.
First, not all units receive full 24 months of payments due to iPhones being lost, stolen, broken, etc. Monthly payments are then attributed to the replacement unit and the original device no longer generates monthly revenue payments. AT&T shares revenue per iPhone customer (activated device), not for each device sold. Thus, Apple has sold two handsets yet only collects $15/mo, or theoretically $7.50 per device.
Second, not all iPhones sold were activated with a participating carrier (unlocked), so a significant percentage of legacy iPhones (maybe 40%-50%) don?t receive carrier payments. Unlocking has actually been beneficial because it has allowed Apple to sell units that it would have never sold, and it has generated product exposure in foreign markets. Yet, for the sake of modeling, and for cash flow comparison between the former and current revenue models, we can?t assume that the average monthly payment is $15 across all units.
Third, many units will be replaced with 3G iPhones before the full 24 months elapses. 2.5G iPhone owners who upgrade to the subsidized 3G model contribute maybe 12 months (or less) worth of payments. Piper Jaffray?s survey on launch day found 38% of 3G buyers were current iPhone owners.
Just for the sake of illustration, assume 50% of iPhones are unlocked (or lost/broken), and one-half of the other 50% upgrade to the 3G model after 12 months. This leaves 25% with 24 months of revenue payments At $15/month shared carrier payment, the average unit revenue/month is $5.63, or $135 over 24 months. Assuming ASP of $430, total revenue/unit is $565 (not accounting for time value of money). Therefore, it?s unrealistic to assume that the legacy iPhone revenue model was bringing in $790/unit ($430 + $15 x 24m).
With the subsidy payment model, there isn?t any uncertainty as to what the actual realized revenue / unit will be, since all payments occur on the front-end. Sales thus far have been skewed towards the 16GB model, which AT&T (T) is offering for $299 with a 24-month contract, or $699 for no commitment. Similar arrangements exist in foreign markets, and the pricing works out to be roughly equivalent on a currency translation basis. So, AAPL could be capturing over $600/unit; a more conservative figure would be $550 or $500. Thus, Apple is likely receiving revenue per unit commensurate to the 2.5G iPhone.
A major point that I feel is overlooked relates to the timing of cash flows. For example, consider the following illustrative assumptions. Apple receives $600 upfront on the 3G opposed to $450 upfront and $150 in total cash payments spread over 24 months for the 2.5G. The accounting will look the same for both models since total revenue/unit is equivalent, and in both cases is recognized over 24 months resulting in revenue of $75 per quarter. Even though both scenarios appear to be similar from an accounting standpoint, the cash flows are different. All cash flow from the 3G hits at the time of the sale, where as just a portion of 2.5G cash flow occurs on the front-end.
To summarize my points: 1) 3G iPhone realized revenue/unit is higher- not every 2.5G iPhone generates shared carrier revenue, and not all units that have attached payments will survive the full 24 months.
2) Time Value of Money- Apple receives 3G iPhone revenue upfront, whereas the previous model entailed deferred revenue payments. Not only is there the opportunity cost of forgone investment alternatives, the cash payments are uncertain.
3) 3G model?s production cost is estimated to be about $55 less that the original model.
4) Demand, demand, demand. More markets, more features, cheaper price. The first iPhone took more than two months to sell 1 million units, which the 3G iPhone surpassed its first weekend.
The new 3G iPhone and revenue model will dramatically boost Apple?s cash flow that should result in a higher valuation. Not only is demand substantially stronger for the 3G model, but the actual revenue/unit realized will be higher, and the cash flow will occur sooner.
iPhone Impact: If Apple sells 20 million iPhones next year—assuming: $500 ASP, 50% gross margin. 30% tax rate—it will generate incremental cash flow of $3.90/share. Assuming that Apple sells 5 million in each quarter, the accounting treatment would only recognize $1.23/share for 2009. Cash earnings are more than 3x higher than reported earnings. Using more aggressive assumptions: $600 ASP, $250 COGS, the iPhone would produce $5.50 CF/share. Subscription accounting would only report $1.72/share.
The assumptions I am modeling for FY09: 20 million units, $350 subsidy, 65% 16GB ($299) & 35% 8GB ($199) = $614 ASP, $233 production cost, 30% tax rate. This calculates out to 5.32B in after-tax cash flow, or $5.92/share.
Apple’s FCF/share [ttm] is roughly $6.84, a price multiple of 23x. In contrast, Apple trades 31x EPS [ttm]. I estimate that $1.10 of the $6.84 CF/share is iPhone related, thus FCF/share associated with all other segments is $5.74. With a 25% growth rate, non-iPhone CF increases to $7.18/share in FY09, and adding $5.92 from iPhone, CF for FY09 totals $13.10/share. This figure equates to a price multiple of 12x, and as mentioned previously, Apple is trading 27x FY09 EPS estimate of $6.05.
This is more or less a ?back of the envelope? exercise, but the purpose is to illustrate the vast difference between Apple?s cash flow and accounting EPS due to iPhone revenue recognition.
Apple?s Free Cash Flow- Apple is an impressive free cash flow generator. The primary components of free cash flow are 1) NOPAT- net operating profit after-tax 2) Working-capital requirements 3) Investment in fixed assets (capex).
Apple?s has negative working-capital requirements due to rapid inventory turns. AAPL turns its inventory about every 7 days, or 50x a year. Apple?s collection period for outstanding receivables is slightly more than 20 days, yet it doesn?t pay its suppliers for roughly 90 days. Thus, Apple doesn?t need to sink additional cash into working capital as sales increase, since it?s funded through trade credit. This would allow more cash to be distributed to shareholders since it doesn?t need to be retained to fund operations.
Apple?s capital investment needs are quite modest. FY07 capex was $735 million and $893 million for the last 4 quarters. This equates to roughly 3% of revenues, and when depreciation is taken out, net investment is approximately 1.7% of total sales. A sizable portion of Apple?s capital investment relates to retail store growth. Apple?s stores produce extremely high revenue per square foot, as well as attracting consumers unfamiliar with the Apple brand. Retail stores perform a marking function for Apple due their appeal that generates substantial foot traffic. The stores are also ideal for cross-selling Macs to consumers who have come to purchase an iPhone or iPod. Thus, Apple?s retail store strategy has proven to be a very worthwhile investment.
Much of Apple?s assets are intangible, thus not reported on the balance sheet. Intellectual capital and brand equity are just two examples. Relatively speaking, Apple doesn?t have to spend heavily on developing these assets. Apple?s marking spend is 2% of revenue as it enjoys doses of free advertising from the media and word-of-mouth from satisfied users. Apple?s research and development expense is just slightly more that 3% of sales. In comparison, R&D for Yahoo ~16%, Google ~13%, and Amazon ~ 6%.
Conclusion:
In summary, EPS [ttm] is $5.11 or 15% net margin, and free cash flow as a percentage of revenue is 20%. As iPhone sales increase, these two metrics will diverge further, yet the focus should be on cash flow. It?s widely accepted that the iPhone has a much higher gross margin than the overall Apple business, yet due to subscription accounting, the iPhone?s impact on overall gross margin is very minimal. Thus, panic over the gross margin forecasts is misguided because on a cash basis, gross margins would be much higher. Investors should then place less weight on Wall Street earnings estimates. Therefore, when evaluating Apple on its prospective cash flows, shares look attractive under $160.
[Note: changed the title of this topic for neatness ]
To summarize my points: 1) 3G iPhone realized revenue/unit is higher- not every 2.5G iPhone generates shared carrier revenue, and not all units that have attached payments will survive the full 24 months.
2) Time Value of Money- Apple receives 3G iPhone revenue upfront, whereas the previous model entailed deferred revenue payments. Not only is there the opportunity cost of forgone investment alternatives, the cash payments are uncertain.
3) 3G model?s production cost is estimated to be about $55 less that the original model.
4) Demand, demand, demand. More markets, more features, cheaper price. The first iPhone took more than two months to sell 1 million units, which the 3G iPhone surpassed its first weekend.
EL: Great bull-story summery. Use this information as an edge.
Conclusion:
Investors should then place less weight on Wall Street earnings estimates. Therefore, when evaluating Apple on its prospective cash flows, shares look attractive under $160.
EL: Investors should brace themselves for Wall Street iPanic no matter how bullish Apple’s future looks to be or in point of fact, really is. Wall Street will sell into any reduced guidance no matter how stupid it may seem to do so. Period.
[quote author=“Eric Landstrom”]EL: Investors should brace themselves for Wall Street iPanic no matter how bullish Apple’s future looks to be or in point of fact, really is. Wall Street will sell into any reduced guidance no matter how stupid it may seem to do so. Period.
Indeed they will, have, and did. And that’s why you have to buy AAPL when everyone else is selling it like its toxic waste. Why? Because of [see edge you noted above]
Wall Street always gets AAPL wrong. This is no different. This is our buying opportunity in the face of their ignorance and stupidity. There’s blood on the streets. Sure you might slip up a few times on the way to the stock exchange, but its time to start slowly position building, even whilst knowing there’s another $25 downside or so possible (at worst).
[quote author=“Tommo_UK”][quote author=“Eric Landstrom”]EL: Investors should brace themselves for Wall Street iPanic no matter how bullish Apple’s future looks to be or in point of fact, really is. Wall Street will sell into any reduced guidance no matter how stupid it may seem to do so. Period.
Indeed they will, have, and did. And that’s why you have to buy AAPL when everyone else is selling it like its toxic waste. Why? Because of [see edge you noted above]
Wall Street always gets AAPL wrong. This is no different. This is our buying opportunity in the face of their ignorance and stupidity. There’s blood on the streets. Sure you might slip up a few times on the way to the stock exchange, but its time to start slowly position building, even whilst knowing there’s another $25 downside or so possible (at worst).
On sharp, iPanic down sides I fully agree with you and any value investor/trader willing to buy when margin calls are forcing people to liquidate. But on slow fades where the stock seems to ride over the sunset into the bowels in the abyss, best to stay out until you begin to see volume pick up steadily. Tommo, you know this but for those who do not, increased volume means an increase in buying interest. Where investors get trapped is by purchasing at a perceived value and then riding that position down to nothing. Pros dump and come back at in at a lower price or they flip selling out from under a losing long position while also selling sort.
Where are we now? Sideways. Next week? sideways to up.
[quote author=“Eric Landstrom”][quote author=“Tommo_UK”][quote author=“Eric Landstrom”]EL: Investors should brace themselves for Wall Street iPanic no matter how bullish Apple’s future looks to be or in point of fact, really is. Wall Street will sell into any reduced guidance no matter how stupid it may seem to do so. Period.
Indeed they will, have, and did. And that’s why you have to buy AAPL when everyone else is selling it like its toxic waste. Why? Because of [see edge you noted above]
Wall Street always gets AAPL wrong. This is no different. This is our buying opportunity in the face of their ignorance and stupidity. There’s blood on the streets. Sure you might slip up a few times on the way to the stock exchange, but its time to start slowly position building, even whilst knowing there’s another $25 downside or so possible (at worst).
On sharp, iPanic down sides I fully agree with you and any value investor/trader willing to buy when margin calls are forcing people to liquidate. But on slow fades where the stock seems to ride over the sunset into the bowels in the abyss, best to stay out until you begin to see volume pick up steadily. Tommo, you know this but for those who do not, increased volume means an increase in buying interest. Where investors get trapped is by purchasing at a perceived value and then riding that position down to nothing. Pros dump and come back at in at a lower price or they flip selling out from under a losing long position while also selling sort.
Where are we now? Sideways. Next week? sideways to up.
Disagree with this. These are volatile times and things can flip in either direction in a microsecond. The bottom line is…nobody knows and so you look at the company, its products, its fundamentals and then decide. Apple, based on all of that IMO, is a screaming buy. The best approach is to just buy in slowly, building up a position and to BE PATIENT. It hurts. It sucks. It’s stressful. But it is what it is. Swing trading this stock is extremely risky and always has been (I used to). Looking back, even though I made a good deal of cash on AAPL with swings over the past couple of years, I was much better off had I just bought in and held longterm, buying more on major pullbacks (of which this is one).
Here’s another good, succinct piece which tries to educate the less well-informed as to why P/E is redundant as a metric with which to measure AAPL’s financial success:
Replacing P/E in Valuing Apple Stock (Seeking Alpha)
by: Stephen Coleman posted on: July 31, 2008
The price earnings multiple (P/E) is an increasingly useless metric when valuing Apple Inc.?s (AAPL) stock price. The reason why is that Apple now uses subscription accounting. Therefore, Apple recognizes the sales and earnings of certain products such as the iPhone, Apple TV, Apple Care and others over a twenty-four month time frame. By deferring its sales and earnings on significant products, Apple?s understates the health of its business.
The truth about Apple?s health can no longer be found in its earnings report. The truth resides on the balance sheet by calculating the change in cash. We define ?cash? as the sum of cash and cash equivalents plus short-term investments. This is the same way that Apple itself reports cash.
The recent example of Apple earnings report (see conference call transcript) totally exposes how useless the price earnings multiple has become, as it relates to valuing Apple?s stock. Apple recently reported earnings of $4.6 billion for the twelve months ending June 30, 2008. Apple reported cash generated in the same twelve month period of $7.0 billion.
The variance between reported earnings and cash generated is $2.4 billion. I believe that Apple?s ?True Earnings? are the $7.0 billion in cash that it generated in the past twelve months, fully 52% higher than its reported earnings of $4.6 billion over the same twelve month period. If you divide Apple?s ?True Earnings? of $7.0 billion by Apple?s 886 million shares outstanding on June 30, 2008, you get Cash Generated Per Share of $7.90 versus the reported twelve month earnings per share of $5.19.
If we use the current stock price of $160 per share, the Cash Generation Multiple [CGM] is 20.3x which compares favorably to the price earnings multiple of 30.8x. I believe that Apple is selling at 20.3 times its true earnings of $7.0 billion.
Apple?s stock price is cheap, if you use CGM as your valuation metric. The CGM will be my valuation metric for Apple inc. going forward.
Is this $7B ytd cash production correct? I haven’t been following too closely lately… WTF are they doing with the cash? And why oh why are we at $160?
[quote author=“Tommo_UK”]Here’s another good, succinct piece which tries to educate the less well-informed as to why P/E is redundant as a metric with which to measure AAPL’s financial success:
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