A Bruised but Still Tasty Apple

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

For those of you not focused on the gun rights debate diversion coming out of DC this past week, you may have recognized that it was option expiration time. And anyone with some level of trading acumen (or at least who thinks they do) knows that option expiration week typically adds even more volatility to stocks that are already likely to be volatile. With three of The SuperTechs, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT) reporting earnings this week, and Facebook (NASDAQ: FB) scheduled to report next week, this option expiration week for these companies was a wild ride.

For the week, the general market trend was higher:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591517050592659-Jeff-Binkley_origin.png" />

But the SuperTechs provided a mixed bag.

Apple was down:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-135915182670856-Jeff-Binkley_origin.png" />

Google was up:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591518633440676-Jeff-Binkley_origin.png" />

Microsoft had some crazy moves but was modestly higher at the week's close:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591519047718916-Jeff-Binkley_origin.png" />

And Facebook was apparently anticipating good news next week:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591519408239124-Jeff-Binkley_origin.png" />


Apple's a strange case. With its followers camping out for days in line to buy each new generation of its highly successful and intuitive products, and its seemingly never-ending ability to beat analyst estimates, it had appeared that the company could do no wrong. It was "perfect." But funny thing about perfection, at least when man is involved--it never lasts.

The company has been on a meteoric rise for years. Looking at the ten-year chart shows some dips along the way, but overall an outstanding chart:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591520936756687-Jeff-Binkley_origin.png" />

But as I said before, when Man is involved, perfection never lasts. Especially when millions upon millions of traders and investors with their millions upon millions of individual opinions, financial situations, and personal levels of fear and greed enter into the mix.

An astonishing track record.

Four years is not a long time. For those of you visionary enough back in January 2009 to recognize the potential for a company tuned in and focused on smartphones and tablets, and the coming exponential increase in the availability of high speed internet service to provide content seamlessly to those devices, Apple has been a great investment. It's been a "6-bagger" (your $100 investment in January of 2009 grew to $700 by September of 2012).

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-1359152212220177-Jeff-Binkley_origin.png" />

But since last September the stock has traded off, falling over 250 points from its high water mark.


Irrational cynicism

In answering that question, there's plenty of data to digest. There's plenty of opinion as well. From fanboys to haters, you can't go to an investment website without getting an earful of both abhorrence and adoration for the company, its products and its potential as an investment.

I'm neither a hater nor a fanboy. And like everyone else, I have opinions about Apple and why September, 2012 was such a turning point in Apple's history.

People discovered that the company wasn't "perfect."

When a movie blockbuster fails to meet ticket sales expectations its opening weekend, it very likely continues to underperform at the box office for its entire run. Apple, in its September release of the iPhone 5, failed to meet its blockbuster expectations of sales… and the stock price has yet to recover.

Please note that I said the stock price, not the company, has failed to recover. The company continues to outperform, yet the stock continues to act "irrationally."

Revenues were $54.5 billion, up 25% over calendar Q4 2012

  • Profits were $13.81 billion, up 13.5% over calendar Q4 2012
  • iPhone sales were 47.8 million, up 39%
  • iPad sales were 22.9 million, up 64%
  • Mac sales were 4.1 million, down 15%
  • Cash on the balance sheet was $137 billion.

And yet when these numbers came out, far better than any other SuperTech n the S&P 500, the stock fell throughout the rest of the week.  Irrational behavior, to say the least.

Which brings me to why I like Apple--thoughtfully recognizing irrationality and throwing it out can make investors successful indeed.

A look at fundamentals

The price earnings ratios (P/E) for the SuperTechs make for an interesting study. I consider P/E ratios to be a "quantification of hope" for a company's future stock performance. Those with high P/E ratios have many, many people hoping (with their dollars) that the company will outperform.

Take, for example, Facebook. There is a lot of "hope" driving that stock price as reflected in the P/E ratio current and estimated forecast:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591524878549695-Jeff-Binkley.jpeg" />

The more mature companies have "hope" in their P/E's as well, just not the exuberance that FB has:


<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591525413019342-Jeff-Binkley.jpeg" />


<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-13591526125549505-Jeff-Binkley.jpeg" />

and finally AAPL:

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/25/1079033-1359152660649878-Jeff-Binkley.jpeg" />

One vision from a cloudy crystal ball: A cheaper iPhone

Earnings are a derivative of profits, and profits are a derivative of revenues, and revenues are a derivative of market share. Apple's market share of worldwide smartphone sales has been declining. In the third quarter of 2012, Apple held only 14.9% of worldwide smartphone shipments, falling from a peak of 23% in the fourth quarter of 2011. The iPhone has been Apple's chief revenue driver, with sales of iPhones, accessories, and services making up 48% of revenue for the quarter ended last September.

How does a company recover market share? One way, which Apple has reportedly been considering, is to offer a line of products at lower prices. Apple has been considering a more price-attractive iPhone since at least 2009, with the idea of adding market share through introducing people to the brand who have previously been price sensitive. Quality issues will remain a focus, but does the iPhone have to be encased in aluminum? Can recycled iPhone parts live again in new products? That could both be green and positive for margins.

Overseas buyers are significantly more price sensitive than we Americans. A cheaper iPhone may be very positive for sales (revenues) in developing markets.

I make no argument that Apple has not hit a spell of negative price performance and that its future remains cloudy. I have no disagreement that there has been a significant drop in excitement, both professional and anecdotal for the company. My contention however, is that with a track record of creatively conquering past performance issues, and the stock now at an attractive P/E ratio, while possibly increasing overseas revenues from cheaper iPhones coming online. Apple now deserves a good, hard, fundamental re-examination for addition to the tech portion of your portfolio.

jcbinkley has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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!

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