Understanding Apple: Flash – New High – Where is it Going?

Malcolm is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Friday, Apple (NASDAQ: AAPL) closed at a new record high of $648.11. I usually do not predict stock prices, but I think I will make an exception here.

First, let’s look at what is driving the current rise.

New iPhone & iPad Mini

Last quarter earnings was a disappointment, largely do to the fact that iPhone sales were well below expectations. This was most likely caused by consumers waiting for the next version of the iconic smartphone. This wait will soon be over, with the rumor mill predicting Apple will have an announcement on September 12, and the new iPhone will be released on September 21.

Rumors are just that, rumors. Especially with Apple one needs to take these with a large grain of salt. One never knows where the truth lies. Thus, I have remained somewhat skeptical of the iPad mini ever since people started talking about it. It's not that I do not believe them, it's just that I did not have strong reasons to believe one way or the other. The history of Apple rumors has been so problematic. This changed in the last couple of days, however, with photos released by blog site iResQ. The photo here (below the fold) shows dock connector and associated board for both iPad Mini and the iPhone, each in black and white versions. To my mind, these are way too detailed to be fake. I have therefore jumped into the “iPad Mini is a reality” camp, and also believe that it will be released soon.

The iPad mini, with the screen in the 7-inch range, will compete head-to-head with the smaller tablets such as the Amazon (NASDAQ: AMZN) Kindle Fire, and the Samsung Galaxy Tab, 7-inch models both of which run variants of Google’s (NASDAQ: GOOG) Android operating system. While this new product will probably not be as cheap as a Kindle Fire, it most likely will have a much higher build quality and quite a few additional features. Its comparison with the Galaxy Tab will remain to be seen.

History

Below are several charts, first five year and then 1 year, ending Aug. 17 (note that the 5-year is on a log scale, so a doubling of price at any place on the scale is the same vertical distance).

What we see here is interesting, starting with the five-year chart. (Although we do need to ignore 2008 and the fallout from the Great Republican Recession.) What we see here, is a repeated series of rises followed by a local maximum followed by a correction/consolidation that lasts some period of time, followed by a new leg up. In fact, if you request a chart beginning at January 1, 2002, shortly after the release of the original iPod, then you will see that this pattern is one that has been repeated for about the last 10 years.

Looking at the 1 year chart, we see it is a magnified view of one of these cycles. The price begins with a long consolidation, followed by a very steep rise to a local peak in April, then retreats to a local minimum in late May, then into a consolidation period for couple of months, then finally we had on Friday a new all time high. The question is, will we continue again to yet one more steep leg up, or is this just some artifact that will change and break the pattern?

The argument for breaking the pattern is simple. Apple is just too big to continue growing at its previous rate. Nothing can double forever. It would not be long before Apple would have more dollars in the bank then there are particles in the universe. This is clearly impossible, no matter how much of an Apple fan you may be.

The counterargument is also simple. It states that while the basic premise of the paragraph above is true, Apple still has several more doublings in its immediate future. These doublings will be driven by product cycles, new products, and growth in markets (especially China).

The Drivers

Immediately, the drivers for Apple’s current rise will be the next-generation iPhone and the iPad mini. I believe that both of these products will jump out of the gate with sales surprising even to Apple itself. The new iPad Mini (whatever Apple should decide to call it) will immediately be embraced as the dominant product in its class.

Once again, within days of launch both products will have delayed availability. If the release for these products is indeed 21 September, then these launches will be reflected in the fiscal Q4 earnings.

We can add into this, the fact that Apple currently has strong momentum, both in short term and long term scales, and that many consider it to be undervalued. At this point (Monday, noon) Apple has roughly a P/E (ttm) of 15.5, and a forward P/E (1 yr) of 12.3. Neither of these figures are adjusted for the roughly $100/share in cash and cash convertibles. 

So, what will happen with the stock price?

Prediction

Of course any prediction on the movement of any stock is predicated on the assumption that external conditions will remain about what they are today. That is to say, that the economy will continue to move along at a slightly improving rate, that there will be no great leap forward in terms of the economy, but at the same time, there will be no movement back into a deeper or double-dip recession. When not in one of its great run up cycles, Apple tends to track with the economic and overall market conditions. In fact, it amplifies those movements in many cases. Therefore a radical improvement in the worldwide economy would amplify Apple’s run-up, and conversely, a major downturn would drive Apple's stock price negatively.

That said, I predict a major run-up, beginning at the local low on May 17, 2012 ($530). This will closely mirror the run from Nov. 25, 2011 ($364) to Apr. 9, 2012 ($636). This was about four and a half months, and 74% price increase to the top, which would take us now to $928. However, since we have already had a significant run-up, I don’t think it will go that high initially. I do agree with Topeka Capital Markets analyst Brian White that within a year we will meet his comical number $1,111, but not in this run. 

It will not be a completely straight run. There are still many who believe that the “buy the rumor, sell the news” scenario applies to Apple. They will temporarily drive the price down after the announcement, as they take profits and perhaps sell short thinking that the news is out. This, however, will be short-lived as new news breaks of a record-breaking initial weekend sales after the 21st. So there will be a dip, but only to build for the next move up. This will also be driven by the typical run up going into earnings announcement. From there it will continue up over the next several months to settle into the $850 to $900 range.

As I always say… We shall see.

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Note - This was originally penned on the weekend – so todays rise (currently $14+) seems to indicate I have it right.

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Malcolm Manness has a Masters degree in Computer Science, and has worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50CentFlash.com/.

 

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

Previous article: Apple vs Google Maps.

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JaanS is long Apple. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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