Apple Is Done...For Now
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just my title alone might make a lot of shareholders very angry, but there is a reason why I am saying this. To me Apple (NASDAQ: AAPL) was done back in March of 2012 when it announced that the largest company in the world would start paying dividends of $2.65 a share, nearly a yield of 1.8% at the time. By "done" I mean the company has reached its plateau as a growth story, not that its going to be any less favored.
What did the dividend announcement signal to a foolish investor?
The company entered its maturity phase. All companies experience the four stages of business life cycle which are development, growth, maturity and trough. I suspected maturity when the tech giant decided to pass on its earnings to shareholders in a form of dividends rather than reinvest or take on extra risk. This was a signal that a stock was turning from a growth story to a safe dividend blue chip.
With Tim Cook taking leadership, I assumed that he was not eager to take on additional risk despite him reiterating that investing in research and development as well as long-term supply contracts would remain the core of Apple's strategy. With Job's recent death and fierce competition from Samsung, the stock surprised me as it continued its upward surge from $530 to $700 in subsequent months.
Snowball effect was evident in the chart below when the stock hit $700 despite missing earnings of Q3' 2012 reporting $9.32 per share, as pundits were irresponsibly tossing around the number $1,000. What was brewing in everyone's mind was how soon is the stock going to reach a $1,000, but completely ignoring competition from Samsung, Blackberry, Nokia and Amazon. This is when I knew that we were stepping into the "irrational" zone, running through a field full of mines and hoping none explode under us as we reached our specific dollar return.
Stock Price Sensitivity
What is also common in companies reaching their peak is that consensus expectations run so high that a slightest miss will result in investors fleeing in panic. Observing the green bar for Q1'2013 and its price overlay chart once again, the stock should've been at $700 now, not in September. One can see the overreaction in the 12% drop on January 24th after Apple reported $13.1 bln. in profit and a record breaking $54.5 bln. in revenues. A gross margin drop of 6.1% tumbled the stock below $450, talk about sensitivity!
The weekly average revenues was $4.2 bln. in the quarter compared to $3.3 bln. in the year ago quarter. It sold a record 47.8 mln. iPhones compared to 37 mln in the year ago quarter. Apple sold a new record of 22.9 million iPads during the quarter, compared to 15.4 mln. in the year ago quarter. It sold 4.1 mln. Macs vs. 5.2 mln. a year ago, so what was the problem? The problem was the lower guidance in gross margins of 37.5% and revenue expectation of $41-43 bln. for the next quarter, which triggered an inverse snowball effect that was completely expected in my opinion.
Just because Apple fell behind ExxonMobil in terms of market cap. means absolutely nothing. It is still a preferred tech dividend play with plenty of cash and ability to buyout its competition if it chose to do so tomorrow. It pays nearly as the 10-year treasury bond and at the current stock price I think Apple is a screaming buy, considering that it still carries low debt levels and should gain upwards momentum once any new innovations are released. Now whether you're buying into the idea that Asian markets are getting tired of the pricy iPhone is a different story. So far it hasn't shown up in the numbers, but competition is always something to be concerned about.
The year 2013 just began and who knows what the company has hiding under its sleeves. The recent bloodbath most likely will result in a quick 3-5% recovery after all the smoke clears, followed by a period of hesitant buying. After which fund managers will sell into any strength they see until the recent scar starts to heal and the majority realizes that the stock is undervalued again. The recovery might be even more fierce as we also have a boost from low unemployment figures and improved housing numbers. On one side we have a great company aided by improved economic data and on the other, an overly pessimistic public that is now fearing a stock action but not so much for fundamental reasons.
edgarambart30 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!