Archive for May, 2014

Hard not to get excited by all the Apple activity.  Very cool that one of the very oldest tech companies is still one of the most relevant.

Problem has been that Apple has been in the penalty box for the last few years… people have been waiting and waiting and waiting for the “next big thing.”

It’s Apple’s fault.  They’ve certainly teased the market… Tim Cook hasn’t been shy about saying how excited he is about R&D quarter after quarter after quarter.

Somehow it now feels a bit different.  Other key execs are now very publicly making rather bold statements:

Later this year, we’ve got the best product pipeline that I’ve seen in my 25 years at Apple.”  

— Eddy Cue, Apple’s senior vice president of internet software and service, at a tech conference on Wednesday

I’m not crazy that he qualified the statement with “Later this year”… something almost everyone reporting on the statement seemed to gloss over.  But I still think it’s a significant statement… and significant that there is finally some kind of timeframe associated with whatever the heck they’ve been working on for the last four years since the introduction of their last great product the iPad.

What might he mean?

The easy guess is the iPhone 6.  That upgrade cycle — probably the biggest in smart phone history — could easily take Apple to $700.

“Pipeline” is usually plural, though, meaning we should see other announcements before year’s end.

Tons of rehashed speculation about these — a payment system (big), better iCloud (bigger), and an iWatch (not so big) — but my personal favorite is that Apple really, truly, finally releases an iOS development platform for “Everything Not Mobile”… also being referred to today as the “Internet of Things.”  i.e., your family big screen TV — decidedly not a mobile device — will be the center of your home’s universe, including, of course, completely reinventing the home entertainment experience.  (Here and here.  And you thought Apple was only building a cool-looking TV. <smile>)

That kind of pipeline could make AAPL skip all the way up to $833.

Normally I would say a 200 point jump from today’s closing of 633 is unrealistic in any kind of short or medium-term timeframe.

But, here’s the thing about any big stock split — like the very one they’re doing next week that will most likely take the stock to $90 — $90 to $119 doesn’t seem like such a big moveon the contrary, that seems rather normal for a company on the move…

… which is why I think AAPL will surprise everyone, even the most hardcore fanboys out there… and especially those folks that like the number “33.” <g>

 

P.S.  My $833 number isn’t just simple psychology… there’s math behind it, too.

Measured by P/E, Apple has famously been trading at about a third discount to the average S&P stock for a couple years now — even below its own perennial average — that penalty box mentioned above.

Which I have to say is weird.  Even at its low point, Apple continued to be the strongest brand — and one of the most phenomenal cash-generating machines — in the world.  Surely that merits at least “average”?  Average gets AAPL into the 800’s.

But maybe more important, because of its massively spectacular run between 2004 and 2012 — something like a 50x return (!) — everyone on the planet ended up owning AAPL for a long time.

Two things were apparent:  (1) If everyone already owned Apple, no one was left to buy Apple… as in bid up the price.  And (2) people were naturally itching to take profits.

Given those factors, you only need a spark to send a stock in the opposite direction.  That spark — JOLT — came as Android proved to be a real competitor… and when Apple’s “next big thing” always seemed to be “next quarter”… quarter after quarter after quarter.

The confluence of all of those things meant that people had enough and bailed… resulting in an almost 50% decline in stock price… a thorough thrashing in 2012 and 2013.

Which gets me to my point:  There are now lots of buyers on the sidelines… and the stock will doubtlessly run as everyone ventures back in.  The fact that the stock will be “cheaper” after the split means even the little guy will feel like they can participate, too.

Indeed, momentum is a powerful force… both in nature and on Wall Street.

Which leads me to an investment philosophy I have that applies to this situation:  The pendulum always swings too far.  As I believe Apple stock will in this situation, too.

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I have nothing against billionaires, in particular Carlos Slim.  But recently I read this headline:

     Bill Gates reclaims top of Forbes billionaire list from Slim

I don’t know why, but this makes me feel better… it’s like all is normal with my world again.

Psychologically speaking, all AAPL investors are used to AAPL trading in triple digits.

And because the stock price is so high, small percentage moves still look like big $ moves.

So while the pundits all claim that Apple’s upcoming stock split won’t really make any kind of material difference, I wonder if it might?

After the stock split AAPL will probably be trading in the 80’s or 90’s…

… and I just wonder if — by habit — AAPL shareholders (fanboys all of them) will quickly bid the price up to the split-adjusted $100 “psychological level”?

If that happens, that might be the equivalent of a really quick ride to the old $700 price.

Everyone has already heard that Apple is going to split their stock 7-for-1 on June 2.

People say that it really makes no difference, that it’s purely optical… other than it making some investors feel more affordable.

Well, psychologically speaking, isn’t that a big deal?

But there is also another terrific reason to split a stock… and it surprises me that no one ever discusses it.

Generally speaking, a small beat may or may not drive a stock’s price up… but a small miss is generally a disaster.  Which means a stock with a high price is much more likely to be negatively influenced by a small miss than a stock with a more reasonable price.

Here’s an example:

On April 16th, Google traded at $556.54.  They announced net earnings of $6.27 per share… vs. analysts expectations of $6.44 per share.

Looks like they missed by 17 cents and the stock was down more than $20 the next day… and has slipped even more in the weeks following… a shame for such a stellar quarter.

Had Google split its stock 10-to-1… such that the April 16th share price was $55.65… such that net earnings were $0.63 vs. an expectation of $0.64… because of rounding the miss would have only been one cent … certainly something that feels a lot less.

(There’s that word again — feels — lest we not forget that emotion is a huge factor in short term stock performance.)

Better, without being buried under more ominous headlines, the positive aspects of GOOG’s quarter — of which there were many — may have had more of a chance of being appreciated.

So, I’m very happy Apple is splitting its stock…

… EXCEPT… 7-to-1?  That’s the silliest ratio in the world… 10-to-1 would make TONS more sense… as well as allow for easy comparisons with previous years — we all can divide exactly by 10 in our heads… but I don’t know anyone that can divide 7 consistently in any kind of exact way.

I asked someone in Apple finance what was the story with 7-to-1 and got a, “I have no idea, either!” glance.

Ugh.  I wonder if it’s too late for Apple to fix this?  While I love that AAPL is splitting, it really is absolutely, positively the most silly split ratio ever.