Archive for May, 2020

This is not a Reuters headline you want to wake up to… being put on a Chinese “unreliable entity list.”

Looks like we’re heading for a showdown between everyone’s favorite American president and everyone’s favorite Chinese Communist Party.

And, unfortunately, Apple (AAPL) may be caught in the middle.

Ouch.

Many years ago, someone termed the new leadership in NASDAQ “FANG”… Facebook, Amazon, Netflix, and Google.  Essentially the best of the new tech.

Over the last few years, that morphed into “FAAMG”… Apple and Microsoft got let into the group.  While elder statesmen, there is no doubt that they deserve to be part of tech’s elite.

So powerful is this group that just those five stocks represent 20% of NASDAQ movements.  That is incredible, if not incredibly unbalanced.

And it’s the performance of these five companies that have kept the NASDAQ index from falling like other popular indexes around the world.

For four out of the five companies, the performance has been merited.

We all have to stay at home and have things delivered to us?  Geez, could it get any better for Amazon (AMZN)?

We all have to stay at home and use the cloud to do pretty much everything in our lives… like work… school… socializing… entertainment?  That’s great news for cloud-based leaders like Facebook (FB), Microsoft (MSFT), and Google (GOOG).

So why am I separating Apple (AAPL) from the herd?  After all, our mobile device is absolutely indispensable, right?

Yes, but will people without jobswithout income… scared and uncertain when the crisis will be over… line up for new iPhones come this fall?

I don’t think so.

That is, if there’s even an Apple Store open to line up in front of.

But it’s not just me.  The other day I shared a KeyBanc’s report that iPhone sales in April have declined -77%.

-77%!

No other FAAMG’s business is taking a hit like this… to the contrary, all the other FAAMG’s businesses are being helped by the crisis.

It’s not Apple’s fault that the entire world just stopped.  But it is investors’ fault if they invest in Apple right now.  Because — right now — Apple is getting gutted.

So why is AAPL enjoying the same stock success as these others?  To borrow a phrase from a past crisis:  Irrational exuberance.  

Ultimately reality wins.

Apparently China has punitively banned 35% of beef imports from Australia… because the Australians haven’t backed down on their questions to China about the origins of Covid-19.

And this just days after China floated plans to do an 80% tariff on Australian barley… which apparently completely derailed the trade.

China must be so proud of its Communist Party.

This is the kind of thing that could — should — blow up in their faces.

All I can say is:  GO AUSSIES!

Another harsh Apple headline:

iPhone Sales Crash 77% In April, Hammered By COVID-19 Lockdowns

This is from a KeyBanc Capital Markets report, using internal credit card data, as reported by ZeroHedge.

Here’s the mind-boggling chart.  Notice there is no “black bar” for April 2020 store revenues.  Uh, oh.

Apple iPhone Sales Chart

Another uh, oh:  That light gray bar for April 2020 is the same size as March 2020 — meaning no growth in online sales month-to-month — and is noticeably smaller than April 2019 online sales.

So, so much for Apple’s online sales picking up the slack for their closed retail outlets.

There’s data, in no black or white!

So how in the world could Apple continue sprinting towards an already inflated all-time high?

That’s the real mind-boggling question.

When I was a kid I wanted to have a party with just the popular kids.

My mom was shocked and said, “who the hell do you think you are?  Maybe we’ll have a party without you… !”

Here’s to our mothers… who kicked our butts to make us the best people possible.  God bless them for their efforts.  Happy Mother’s Day to all our moms!

Well, that’s not a good headline.  More evidence that, in the short term, AAPL may have too much of a premium built in.

Here’s the link to ZeroHedge’s take on the new IDC global smartphone report.

Warren Buffett almost single-handedly put a stop to the last financial crisis in 2008.  He penned a now legendary “Buy American.  I am.” op-ed in The New York Times.  That was incredibly significant.  It gave investors the confidence needed to get back on the horse.  If getting back in the market is good enough for Warren, it’s good enough for me!

Yesterday he may have done just the opposite.

At the Berkshire Hathaway annual meeting, Buffett informed, well, the world that he completely liquidated his significant airline holdings.

Too much uncertainty.

Translation:  I’m selling because I think things will go down.

As significant as selling, he’s not buying, either:

“We have not done anything, because we don’t see anything that attractive to do.

Translation:  Yeah, I definitely think things will be cheaper in the future.

So I’m wondering what we’ll wake up to in the weeks ahead?  If Warren’s getting out, should I?!

Everyone loves to talk about how much cash AAPL has…

… I wonder how many people realize how much debt Apple has to offset that cash?

Almost $120 billion worth.  Like 60% of their cash horde, which makes that cash pile quite a bit smaller than most think.

Commenting on Apple’s financials is like complaining after someone just bowled a 300.  They really are perfect.

So, now that I’ve made that disclaimer, I’m going to comment on Apple’s financials.  :)

Well, not so much their financials… as much as their valuation as determined by their financials.  Because I think they suggests Apple has overheated.

A long time ago, the rule was your P/E should be about your growth rate.  Primarily earnings, but people applied this to revenue growth, too, given that earnings was sometimes impacted by operating initiatives.

So, if you were growing earnings around 10% a year… or revenues around 10% a year… you should have about a 10 P/E.

Like everything these days, that’s also been inflated.  Or ignored.  Or convoluted due to a variety of “financial engineering” things.  People rationalize inflating via the term, “multiple expansion.”  But regardless of creative justification, it’s still a grounding rule-of-thumb that offers some perspective.

How does all this apply to Apple?

AAPL’s P/E is just over 23.

Over the last few years, AAPL’s average earnings growth was about 14.5%.  AAPL’s average revenue growth was about 7%.

See the problem?

On either measure, AAPL is overvalued by a good chunk.  Sticking with just earnings (the higher percentage), that suggests AAPL should be trading around $200 per share.

But it gets worse.

Pre-pandemic, Apple’s Q1 earnings were up 19% comparing like quarters.  (Revs were up 9%.)  Still below P/E, but at least you can see that earnings growth was within spitting distance of it.

Post-pandemic, Apple’s Q2 earnings were up 4%.  (Revs essentially flat.)  Now that’s way below P/E.

But here’s the bottomline:  The combined earnings growth of 14% for the first half of the fiscal year doesn’t account for the fact the next few quarters are going to look more like Q2 than Q1.  Due to the pandemic, earnings and revenue growth at Apple HAVE SLOWED.  For real.

And my point?  The shares are priced like nothing’s happened… for an immediate snapback… but the numbers are already saying this isn’t happening.

Heck, even the company said this isn’t happening on their conference call.

Using my old P/E guideline, AAPL could theoretically be valued around $100 per share.

Now, before anyone thinks I’m a stock-hating crazy or something, I don’t believe that will happen.  Apple is one of the most phenomenal businesses on the planet.  They are so big — and so well managed — and have so many levers — that of course they would make adjustments to their business before that happened.

For example, they could cut a lot of costs.  Duh.

Or, if their hardware business ever sucks too much wind, they could just spin-out their services businesses, which continues to grow impressively through this crisis.

You might say that they would never break up their eco-system… but, believe me, it’s a lot more common in business than you might think.  Usually goes under the term “monopoly.”

You might also say that Apple is just too big to have such a puny valuation.  But there are lots of HUGE companies with puny valuations.  For example, massive distributors with tiny earnings.

So, while I’m not saying AAPL is going to $100, the thought that it theoretically could gives me comfort saying AAPL — in the short term — should be trading closer to $200 than $300.

Apple reporting earnings yesterday.

They beat significantly lowered expectations on top & bottom line.

How excited were analysts?  Not very.  Only a few upgraded price targets (a bearish sign), and then only by small amounts (also a bearish sign).

AAPL tried to rally… but couldn’t make it over $300… and fell back for a loss on the day.

There’s a reason why 80% of analysts CUT price targets going into earnings… because the virus has really bashed Apple. 

Here is the perspective:

Apple’s guidance for this quarter was a revenue range of $63b to $67b.

From Apple’s conference call yesterday, Tim Cook said:

Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter. At the very high end of our expectations.

That means they were on track for $67b.  But actually it probably means they were on track for $68b to $70b… since Apple is notorious for sandbagging guidance.

But, with the virus, they only logged $58b in revenues.  (Still a huge number, btw.)

Assuming even revenue distribution through the quarter, the $67b would have been about $22.3b per month… so theoretically the $58b was $22.3b + $22.3b + $13.4b, since the bulk of the virus problems hit in March.

So… if we take $13.4b as what they did in March… and assume an “uptick” for April (as Cook called it in the earnings call)… and assume things don’t really open up in U.S. or Europe until June… and assume a “normal” June… we could guess revenues might be $14b + $14b + $22.3b or about $50b…

… that’s if everything opens up in June and things go back to the “happy go lucky!” good times of Janurary.

Hello?  Are any of the Apple fanboys bidding up AAPL listening?  That’s still a big-ass revenue contraction… like 30% below a ballpark of what their pre-virus performance might have been… when the stock was hitting an all-time high of $327.85.

So why is AAPL currently trading just 10% below that now?

Because the reality of the next 1-2 quarters hasn’t sunk in for Apple investors yet.

Seems to me my simple, back-of-the-envelope hack calculations suggest AAPL should be down another 20%… or <$240.

And that’s not even including what happens if we see a second wave of infections… or if the market, which shot up in April, naturally cycles down 5-10% in May.

My 2 cents.