Archive for the ‘AAPL’ Category

(NOTE: I wrote this article last week when SKLZ hit $2.16. It was just published in Seek Alpha today. Of course it belongs in my blog, too. :)

SUMMARY

  • People like to bet. Skillz lets people legally bet on their video game play and win money. It’s an entirely new form of entertainment and growing like crazy.
  • In this volatile market, the SKLZ stock has suffered about a 95% drop in value and is now trading at “going-out-of-business” levels.
  • But Skillz is not going out of business. They have created valuable assets and their cash burn can be cut quickly (which has already started).
  • Skillz’s upcoming NFL deal merges two strong money-making themes — betting and playing video football games — and is a strong driver of future earnings.

A Strong Buy.

American Football Action
Thesis

Skillz (NYSE:SKLZ) is woefully misunderstood and undervalued. There, I said it, someone had to.

Misunderstood because investors think it’s a video game company, when it’s actually much more than that. It’s also an enterprise software company… and a legal bookmaker for video games.

Undervalued because investors think the company will run out of money and are pricing it at near-cash levels. But an analysis of their cash burn, combined with operating statements made by the company during their recent earnings announcement and Investor Day calls, suggests otherwise.

Fall From Grace

Skillz has had a painful decline, culminating in a dramatic fall the day after announcing Q4 2021 earnings, crashing just under 20%, but at one point heading to a 40% shellacking.

Sure, it’s not just SKLZ that has felt the pain. The whole market is down, with Nasdaq entering bear territory in early March. Gone are the days of easy money, where the market was handsomely rewarding “growth at any cost.” As long as you were continuing to grow, your stock kept appreciating and if you ran out of money, you just floated a secondary offering at your elevated stock prices and, voila, the market gave you more money.

Maybe it was the end of the trillion dollar giveaways reducing liquidity in the market; or maybe it was rising deficits and oil and inflation and interest rates; or maybe it was bombs dropping on Ukraine and Russia receiving sanctions that inevitably will send ripples through the world’s economy, but the market changed in Q1, and “growth at any cost” was now replaced with, “you better have everything you need to survive because you ain’t gettin’ anything more from us.”

The market doesn’t think so right now, but Skillz is one of the companies that has everything it needs to survive… and thrive.

Why This Company Is Special

Most investors think of Skillz as a video game company, and they do have several in-house games, but they are much more than this. Their primary focus is to provide an enterprise gaming platform for other software game developers. Making a game isn’t easy. But the technical requirements to create a scalable enterprise gaming platform – one that handles billions of games per year – goes way beyond simple game construction. Big barriers-to-entry here.

Further, the enterprise gaming platform that they’ve built has an innovative business model. Advertising networks created a massive digital ad industry arbitraging between a buyer and seller of digital ads. Likewise, Skillz acts as an intermediary between two similarly-skilled players in a video game competition and takes a percentage of their “entry” fees.

Said another way, Skillz allows two players to bet each other… with Skills acting as the “house”… a.k.a., the “bookie.” And as it turns out, there is more upside to being a bookmaker in this particular market than may meet the eye. Imagine an enterprise software company that figured out how to become THE bookmaker for the ENTIRE video game world. That’s Skillz.

Online Competition Content Much Larger Than Offline

While traditional sportsbooks allow you to bet on football, basketball, soccer, and maybe a handful of other physical-world sports, Skillz is the bookmaker for potentially every video game in the world. The content for their potential market dwarfs what a traditional sportsbook can ever hope to address.

For example, you might be familiar with a new game causing quite a sensation called Wordle. It didn’t exist several months ago. But now it has millions of players. It’s a game that was created out of digital bits & bytes, i.e., thin airthin air. And it’s only a matter of time when, with Skillz, you’ll be able to bet someone you can solve the secret word in fewer guesses than them.

This shouldn’t be a surprise, though, hit video games are created all the time. But when was the last time a new physical sport was created that you could wager on? Not for a while. Skillz is the only betting game in town that has the potential to take advantage of an ever-expanding universe of digital content.

What Everyone Missed From The Conference Call

One of the two most important statements in Skillz’s most recent conference call wasn’t when the company said they had a lot of money in the bank (gross almost three-fourths of a billion dollars); or solid revenues, almost $109 million for the quarter, up 61% from last year; or 610,000 paying players, up 56% from last year.

It was when the company said… and we’ve been listening to your feedback. Andrew Paradise, CEO, attributed this to shareholders. Maybe. But we also all know it was pretty hard not to hear the market crushing the life out of the stock price, too. Regardless, he continued with a welcomed statement for any public company operating today: “… we will transition from our strategy of revenue growth at all costs to increasing profitable growth and efficiency.

And the second most important statement… the one that everyone seems to have missed? Casey Chafkin, CRO, saying in context to reducing marketing spend, “… the result of that is going to be, and already is…”. That is, that the transition away from “growth at all costs” has already begun.

But can they really turn on a dime? Those that run businesses know they can. Because unlike headcount, facilities, or equipment costs – areas that are hard to cut and where it takes time to see savings – 73% of their 2021 costs were attributed to “Sales and marketing”… and many of these costs are straightforward to turn off.

You literally say, “stop,” and they simply stop. Chafkin even confirmed that on their March 15th Investor Day webcast.

Further, Skillz shared their exact new user acquisition costs for Q4 2021, $85.6 million. Compare that to their reported $99.0 million loss for the quarter. Knowing the bulk of this spending was ineffective and is now being cut, imagine what Q4 earnings could have looked like if they started cutting last quarter. Revenue would not have been impacted much, but instead of a ($0.25) per share loss – with a ($0.10) expectation miss – it might have been a $0.10 beat… and optically more important, a ($0.05) loss would have seemed tantalizingly near breakeven. That’s hardly a company going out of business.

Actually, that would be a company way ahead of plan.

A snippet of SKLZ P&L statement from their Q4 2021 Earnings Press Release.
Net Loss would have looked quite different if ineffective new user acquisition costs weren’t a part of the Sales and Marketing expense line. (Source: Skillz Q4 2021 Earnings Press Release)

Since Chafkin also confirmed in the Investor Day Q&A that the actual cutting started in early Feb, we now could see up to a $40 million savings, or up to a $0.10 per share beat in Q1 2022 results, too. That would be a nice surprise for a stock that could use a nice surprise.

Driving Future Earnings: The NFL
Actual screenshots from one of the new NFL games.
A winning combination: Betting and playing mobile football games. (Source: Actual screenshots from one of the new NFL games that is betting-enabled via Skillz.)

It’s no secret that people like to bet on football. And it’s also no secret that people like to play football video games like Madden. Capitalizing on these, SKLZ has forged a partnership with none other than the NFL and are working with game developers to create NFL-branded football games that let you bet your opponent. Seriously, can you think of a more perfect union than playing NFL video games and betting?

I know many have reported on this strategic partnership but not in this way: That this is an incredibly compelling betting proposition. Betting will go together with video football games like, well, real football and betting.

(Hot-Off-The-Presses: Skillz is offering a sneak peak of all of their NFL-branded games at the 36th Annual Game Developers Conference Mar 23-25. Just an FYI for those that might not believe these are real.)

All Bookies Are Not Created Equal

Thinking about SKLZ as a bookmaker invites new valuation comparisons. One of the monster sportsbooks is DraftKings (DKNG). Both DraftKings and Skillz are online bookmakers. But one takes book for physical-world games, the other for digital games. And while DKNG has about 3x the revenues – and only about 2x the cash – DKNG is valued about 7x greater than SKLZ.

This suggests that either DKNG is trading over twice what it should be or SKLZ is trading at less than half. Given DKNG has more than 3x the analyst coverage, it’s more likely they’re better understood and it is SKLZ’s valuation that’s amiss by half. But I don’t think this is a fair comparison because Skillz has material advantages over DraftKings. DKNG has limited physical-world gaming content they can monetize, while SKLZ’s has virtually unlimited content potential.

Both may be considered bookmakers, but DKNG’s action is considering gambling and thus they have vastly more regulatory requirements and legal expenses. However, SKLZ’s action is not considered gambling, so Skillz doesn’t bear those costs, a significant advantage.

And DraftKings has tons of competition. They have to spend heavily to get into a market and heavily to protect it. Skillz has zero competitors, they invented their market. An awesome – and rare – advantage in business. So comparing SKLZ to DKNG might provide an initial valuation adjustment, but the more you dig into the business details, the better SKLZ looks. Translation: SKLZ shouldn’t be trading at less than half the sales multiple of DKNG, it should be trading higher than DKNG’s sales multiple.

Did SKLZ Really Guide Revenue Downward?

Skillz guided 2022 revenue downward, from $550 million to $400 million. Seems to me, though, they were being extra conservative. Even with no new customers, the company – with just its existing player base – is on a $435 million run rate.

And, per the conference call, they’re working on improving existing player environment and social features. That’s company speak for getting more money out of each player. Typically they could see a 50% lift from these kinds of activities – in fact, SKLZ actually bought one of the domain experts in this space: Aarki, so it’s pretty conservative to project a small 10-15% bump to ARPPU (Average Revenue Per Playing User). That would jump revenues to about $480 million to $500 million.

And, as the company pointed out multiple times during their Investor Day, their guidance does not include the upcoming new NFL games. We can use existing data to help us project future potential here. Just three games accounted for almost 80% of SKLZ revenues in early 2021, or nearly an average of 27% each. It’s important to note that these games do not have household brand names… like the NFL has. So it’s not unreasonable for SKLZ’s NFL games to achieve at least a similar average acceptance within the Skillz player base. As such, and factoring in about half-a-year of contribution, betting on NFL video games could add another 10%-15% to the top line, which pushes potential 2022 revenues to a $525-$565 million range. Right back to the initial forecast, eh?

Yes, there will be some existing player churn. But not included in the analysis above are any additional players SKLZ brings on due to the NFL helping to promote. The NFL has a really BIG megaphone, so of course Skillz will see new players… in fact, the numbers could actually rip much higher. What I think the analysis above says, though, is even looking at it pretty conservatively, their 2022 revenues could still be closer to $550 million than $400 million. Which of course no one is now anticipating.

Revising Misunderstood Price Targets

A few analysts lowered the price targets for SKLZ after their earnings call. The low is now $2.50. My range is $9.00-$12.00. This may be disappointing to those that purchased at higher levels but please know I think this is just over the next six months, so SKLZ will go higher as the company continues to prove it can execute along its new path. And, at least in the short term, it’s a nice opportunity for everyone else. I get to my range by adjusting SKLZ sales multiple to that of DKNG, increasing by 50% to reflect my higher 2022 revenue estimate, and noting that SKLZ’s short % of near 20% is scary high… which inevitably means overshooting when everyone rushes in to cover.

Risks

I think Skillz has been misguided in their big picture customer acquisition strategy. I believe it would be more effective if they spent less time trying to acquire individual players and more time trying to acquire gaming partners and require them to market to their individual players. After all, money is flowing to their partners.

I know many investors may want me to claim that Skillz’s recent $300 million debt financing was misguided as well. After all, it was taken at an eyebrow-raising 10.25% rate. But given that the secondary market has now slammed shut, it feels more like management had a bit of foresight to sock away some extra $’s. With interest rates on the rise, who knows, we might look back and think the money is not all that expensive after all. Don’t forget, with the way they’re now operating the company, they may just surprise everyone and pay it back early.

Churn always worries me. It’s usually bigger for non-betting app games, but smaller for betting games like casino slots and such. If it’s close to the betting norm (1-2%), then I’m less worried.

The real lingering uncertainties I have revolve around the NFL. Are the new NFL games fun and competitive? And what is the business relationship with the NFL? Do the economics allow SKLZ to make a healthy profit; or did they have to sell their soul?

I’m actually OK with the first uncertainty because there are a lot of popular football games to serve as models… and I believe the added, all-important betting component will prove irresistible. People just like to bet on football and play football video games. I am worried about the second uncertainty, though. Having negotiated a partnership agreement with a professional sports franchise in the past, I know they can be quite one-sided. Since the NFL games are the key to the future, bad NFL economics could slow that future down.

Final Thoughts
Skillz corporate values
Skillz Corporate Values (Source: Skillz “About Us” )

Many investors are wondering if SKLZ can turn things around. Here’s something interesting to consider: Skillz actually has the word “frugality” in its corporate values statement. This should give all investors an idea of what kind of guy Paradise is… because that’s not a very glamorous word (i.e., who wants to work for a frugal company?). So if he put it in such a visible place as the “About Us,” it’s genuine. I’ll go even farther and say running a tight ship is in the CEO’s wheelhouse… because he’s a repeat, successful entrepreneur, so none of this is new to him.

So I don’t think the company is going to run out of money like most analysts think, which, ultimately, has created the opportunity here. From trading at about 50x sales about a year ago, SKLZ is now trading at near gross cash levels. What that says is the market is valuing all the rest of the stuff in this enterprise software company – a proven model, scalable, sophisticated technology and infrastructure, an established base of paying players, great multi-year growth, an achievable path to profitability, and a deal with the all-powerful NFL that is also sure to attract other top brands – at just about nothing.

Honestly, at these levels, and with these assets, I don’t know why some enterprise, gaming, or sportsbook outfit is just not trying to acquire them… in the same way I scratched my head that no one picked up Apple when its stock was depressed in 1996. And we all know how AAPL eventually did.

The CEO uses more acceptable language when describing the mission he’s on: To become the “competition layer” of the Internet. That’s fancy but I think investors might like my description even better: To become the bookmaker for every video game on the planet.

That sounds less like a bet and more like a winning investment.

I think every American was heartened at the speed that the U.S., and the free world, levied sanctions on the totalitarian regime of Russia.

A few weeks ago, many said we couldn’t turn off Russia’s access to Swift, that would be the equivalent of an economic nuclear strike.

Then BAM! The EU said, “we’re doing this NOW, please join us.”

Many said we couldn’t stop buying Russian oil, because that would hurt the world, including the EU, way too much.

Then BAM! We stopped buying Russian oil.

Just a few weeks ago, who would have thought so many company would join the battle? Google. Facebook. Twitter. Visa. MasterCard. American Express. PayPal. Nike. Adidas. McDonald’s. Starbucks. Coke. Pepsi. Hundreds and hundreds more… all flipping the middle finger to Putin. In fact, if you haven’t stop doing business with Russia yet, something is wrong with you.

China’s reaction to all of this? Silence in the beginning. A lot of folks say that’s just their way, “to observe.”

I think it’s something different. That they originally thought what Putin thought: “No way the U.S. and the EU can ever get their stuff together to act in concert… and certainly whatever they do won’t have teeth.”

But both Putin and China were oh so wrong. The outpouring of support for Ukraine? STUNNING. BLINDING.

UNANIMOUS.

So China went from quiet cockiness to silent terror… now knowing that the free world has a NEW weapon against oppressors: We’ll just turn you off.

It couldn’t have happened 20 years ago… maybe not even 10… but now the world is really so interconnected, that it really is possible to, say, strangle Russia-the-dictatorship-that-oppresses-people to economic death.

With all this momentum, China realized it had to do something.

Of course they didn’t do what would have been truly helpful to peace… and that is whisper in Putin’s ear, “wtf, it didn’t work, stop acting like a madman!”

Instead it’s s-l-o-w-l-y been rolling out support for Russia over the last week or so. Essentially “reminding” everyone we need to de-escalate because it will further mess up global supply chains and such.

Boy, did Xi miscalculate on that one, too.

Talk turned today of “secondary sanctions” against China. If they’re still doing business with a murderous dictator that wants to take away others’ freedom, then maybe we’ll just turn China off, too.

My reaction?

YES! LET’S DO THAT! NOW!!

Then I got to thinking, why wouldn’t we do this? China is mostly a one-way relationship: They economically abuse us. And every time we ask them to play fair, they cry about it.

Then I got to thinking some more: Which American companies would get hurt by this?

And then it hit me: Apple. The world’s most valuable company. The company that derives 19% of its revenue from China. The company that makes almost HALF of their iPhones in China.

This would be an economic disaster of epic proportions for Apple stock.

And since virtually EVERY person on the planet either has money directly in Apple… or their mutual fund does… or their 401K does… or their bank does where they save their money… and so on…

… hurting Apple stock is akin to hurting every person on the planet.

I kid you not.

Remember the dotcom crash? It started (imho) because Microsoft and Intel, the two companies that used to financially represent everyone in the world, missed earnings numbers and sent shock waves through the financial markets. A history-making crash.

So it’s happened before.

We survived… but remember it was awfully rough for a while… and Microsoft stock price, literally, flat-lined for about the next decade.

If sanctions move to China — whether it’s for their support of Russia — or they start moving on Taiwan — I know every American will feel the way I do: YES! LET’S DO THAT! F*ck China. You sell to your oppressed people… and we’ll sell to the FREE world.

If that happens, I’m not sure Apple wouldn’t get caught in an awfully bloody crossfire.

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.

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.

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.

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.

Dow is a hair away from 24,000 as I write this.  Nasdaq a shade over 8,500.  We’re back to being closer to the top than the recent bottom.

Today’s action felt like it’s really, truly going to be a V-shaped recovery… that we should be back at our old highs in no time at all.

But… b-e-w-a-r-e.

Because it was just a few weeks ago that it felt like the crashing would really, truly never end.

And that’s what happens during a crisis… the mania swings in both directions.

Don’t get me wrong:  We have a lot going for us in this crash.  Oil is really low… and that’s my #1 requirement for an advancing economy.  Companies headed into this crisis with a lot more going for them, too (i.e., real growth, real revenues, and real profits).  And lots of technology companies are going to absolutely thrive in this crisis, for example, Amazon, Netflix, DoorDash… anything to do with the cloud… and so on.

And, critically, the government has backstopped everything with TRILLIONS in bailout money.  (“Oh, yeah, that.”)

But let’s call a few spades spades here:  THE ENTIRE WORLD JUST STOPPED!  That’s going to affect many, many more companies than will benefit.  Stocks ran up waaay too much before the crash, too, so even without a crash, they needed a 10-20% correction just to whack them back in line.  And — most significantly — no one really knows when we go back to normal.

This last point is the key.

This V-shaped rally — where stocks go straight down, then go straight back up, forming a “V” pattern — is almost entirely predicated on us getting back to normal soon.

As in, investors already know this quarter is going to be a disaster, but they think they might have the next one in the bag.

But what about the next quarter?

If I’m the CEO or CFO responsible for offering public company forward guidance… in this environment… there’s no way I’m touching that with a 10-foot pole.  That’s a guaranteed lawsuit just waiting to happen.

So, unless I’m one of the handful of companies that are crushing it during this crisis, there’s no way I’m going to be even the slightest bit optimistic about the future.  Because everything is uncertain.  How long this will last.  What the 2nd wave looks like.  Or the 3rd.  Or if people really are developing immunity.  And so on.

So I either give the biggest low-ball guidance in history — or what is happening more and more — I simply refuse to offer any forward guidance.

That’s when the next shoe drops.

When analysts and investors see this negativity… then try to understand this negativity… then realize they’re now really, truly flying blind… that’s when the rug gets pulled out from under them…

… and the market, too.

Because that’s not going to feel like “soon.”  That will, for a period, feel just like FUD (Fear, Uncertainty, and Doubt).

It’s inevitable.

Because mania is inevitable.

Apple announced earnings today… they beat on top and bottom lines… and even though iPhone unit sales missed by a tad, average sales price crushed expectations.

Sounds good, right?

Not so fast.  Apple is DOWN almost 6.5% in the after market.

Yikes!

Turns out guidance came in a bit light.

And, Apple said it was going to stop reporting on unit sales, which — supposedly — signals to analysts less volume going forward.

Here’s what I think:

WHAT IS EVERYONE CRAZY?!

Apple just reported 40% earnings growth.  That’s right — 40%.  That’s spectacular for any company… but a company Apple’s size?  That’s p-h-e-n-o-m-e-n-a-l.

To put valuation in perspective:  Usually your P/E matches your earnings growth.  So if you are growing at 10%, you have a 10 P/E.  So if you’ve grown earnings by 40%, you should have a P/E of 40.

But that’s not the case for AAPL.  Apple has a trailing 20 P/E… or, even more amazing, just a forward 14 P/E.  Which means there is a case to be made that AAPL is undervalued… it could be trading 100% higher… or even 200% higher in some circles.

Further, with a company like Apple — that is, consistent… steady… predictable — is light guidance really an issue?  Especially given that Apple usually gives lighter guidance… and has been doing so since the days Steve ran the company?

I think not sharing iPhone unit totals is the real issue… and it’s not with investors… but with analysts that are tasked to create projection models.

Fair enough, it will make their job harder.

But, seriously, Apple is consistent… steady… predictable… AND growing earnings at 40%… and, btw, growing revenues at a whopping 20%, too… their job is already pretty straightforward.

So here’s what I also think:  AAPL may initially go lower… but at some point the investment community is going to say, “It’s the #1 product in the world, produced by the #1 brand in the world.  40% earnings growth means they continue to knock the cover off the ball.  Most of the macro economic indicators are still intact.  Uhm, are we daft?!”

That’s when the momentum will shift… and we’ll see AAPL move higher.

And, despite what will seem like a stock-crushing open, I think it could happen sometime tomorrow.

UPDATE:  Well, uhm, maybe next week.  :)

There’s a lot of noise in the market.

But there’s usually a lot of noise.

By definition — at any point in time — 50% of people think there’s enough bad in the market to sell their shares to the other 50% who thinks there’s good.

Can’t have a market otherwise.  That’s why I always scoff when someone refers to “easy” trading periods.  It’s never easy.

What helps guide you through the noise is whether your fundamental investment thesis is still intact.

Is mine?  I think the two biggest drivers of corporate profits — which drive the market — are the price of oil and interest rates.  Let’s see where they stand:

* While oil took a little run to the upside, I wouldn’t call it misbehaving.  In fact, it’s shed much of its 2018 gain

* Interest rates are spooking everyone… but 10-year is sneaking back down… and Trump’s on fire about the Fed messing things up — so much so that a few Fed governors have had to reiterate that they won’t, uhm, mess things up (i.e., “will still be accommodative for quite a while”)

* Sentiment is negative.  While that’s not comfortable, as a contrarian I prefer this

So, for me, at least right now, the noise is… just noise… and what we’re seeing is some healthy “letting some air out of the balloon”… which we like… so it doesn’t pop.

 

P.S.  A great example of “noise” was Caterpillar earnings.  They beat top & bottom line.  But everyone was fretting about China and tariffs… and the stock got pounded… even though if you read their commentary, you find CAT itself wasn’t so worried about the effect of China or tariffs on its business.  Here’s some commentary from their 10/23/18 earnings call:

* CATERPILLAR SAYS FEEL GOOD ABOUT EQUIPMENT DEMAND IN CHINA NEXT YEAR

* CATERPILLAR SAYS EXPECT BUSINESS TO CONTINUE TO IMPROVE IN 2019 VERSUS 2018

* CATERPILLAR SAYS CONTINUE TO EXPECT INDUSTRY SALES IN CHINA FOR 10-TON-AND-ABOVE EXCAVATORS TO BE UP ABOUT 40 PERCENT FOR THE FULL YEAR

* CATERPILLAR SAYS EXPECT IMPACT OF 25 PERCENT IMPORT TARIFF ON ADDITIONAL $200 BILLION CHINESE GOODS TO BE ‘QUITE MINOR’

These are all good things, right?!

I have to hurry this post because Microsoft is about to announce earnings.

For the first time in many years, Microsoft’s earnings are incredibly relevant again.

As many know, MSFT is in the process of successfully reinventing itself… to be a big-time cloud competitor.

Their earnings after the market closes today are important because the market is in desperate need of some kind of clear signal… either that things are still ok in tech land… or they’re not.

It just so happens MSFT is announcing before Apple, Amazon, Google, and Facebook… which means all eyes will be on their report.

Now, Microsoft has a reasonable stage set.  Adobe reaffirmed guidance last week… which I believe single-handled stopped the market from another 5-10% slide… since everyone was/is feeling like we’ve driven off a cliff… given tariffs… and global tensions… and interest rate hikes… and Trump acting decidedly unpresidential most of the time.

And Netflix killed their earnings, too, which even though it doesn’t seem like it, also helped provide some footing in this decidedly negative market.

But some disturbing things are still happening.  iRobot (IRBT), makers of my favorite electronic device in the world (Roomba!), killed their numbers, too… and the stock was still hammered today… simply because they cited some potential tariff impact… even though they still raised guidance.

What the market wants — craves — now is more assurance… that the consumer is still spending… that interest rates, while increasing, will increase in a slow and measured pace… that oil isn’t going to spike… that tariffs are having a positive effect somewhere in the food chain…

… essentially that the foundation for investment is still sound.

A good report from the once most dominate and influential tech company in the world… that has clawed its way back into relevance… could turn everything on a dime.  Stay tuned!

UPDATE:  Earnings were solid.  Beat on both top and bottom lines.  Stock was up almost 5% at one point in the after-hours market.  (BTW, Tesla TSLA also reported and nailed it… it’s up over 10% in after hours… and ironically they mentioned tariffs and it doesn’t seem to be impacting the pop.)

[This is an Apple iPhone Tech Support post.  Totally skip it unless two-step activation has locked you out of your iPhone… and if it has, this may be one of the most valuable posts you ever read!]

I’m writing this after about 10 hours of the most horrible customer services experiences I’ve ever had.  EVER.

I’m telling my story in hopes that Apple fix this… and to save others from the horror I went through.

Background:

I lost the ability to make or receive calls.  WIFI still worked so I was able to get text and email, which actually masked the problem for the first day or so.

Verizon said it had to do with upgrading to 10.3.3, that it could be mucking with the digital antennae or something, and that the solutions was to backup, wipe the phone, reinstall, then restore the backup.

So, I called Apple Support.  They concurred with Verizon and started walking me through the process.

What Apple Support did NOT do, however, was ask me if I was using two-step authentication AND whether I had a second trusted device.

Turns out when I turned on two-step authentication, I thought it was only naturally to designate my iPhone as my trusted device.  Sounds reasonable, right?

WRONG!

This turns out to be DEATH.  And incredibly irresponsible of the Apple Support folks that helped me!

Because when I wiped my phone and reinstalled from scratch, it meant I had to reactivate my iPhone with Verizon… but Verizon requires that I enter in my Apple ID and password and, as the second step of the two-step authentication, the six-digit code that Apple would send to my — you guessed it — inactive device!

I went down Apple’s recovery path… and the automated Apple process told me it would take a few days to add a second trusted device… “for my protection.”  When a few days came, it said it would take a few more.  Then a few more.  Then it said a WEEK!

Before I continue, I want to say that these time estimates were a BIG FAT LIE.  It just kept pushing the date out on me.

And, I want to say it doesn’t matter that Apple was doing all of this “for my protection”… I use my phone for work… and it can’t be non-functional for even a few days!

I literally almost gave up and just bought a new phone… because, after TEN (10) hours of Apple Support help, I wasn’t any closer to a solution.  And — please listen to this, Apple — I was damn close to considering an android, too.

I have no idea why I called Apple Support one more time.  Maybe because I was bleary eyed and wasn’t really thinking.  Maybe because I just wanted to yell at someone.  Maybe because I own Apple stock and just couldn’t believe I was really hung out to dry here.  But I did call one more time, and spoke to Ginger L… and — TO MY INCREDIBLE SURPRISE — she actually had heard of a clever work around for this situation.

And, what do you know, IT WORKED!

Bless Ginger L., she should be CEO of Apple!

Apple, PLEASE FIX THIS.  No customer should ever, ever, ever endure what I had to go through.  PLEASE!
The Ginger L. Solution:  How to activate an inactive device when Apple two-step authentication insists on sending the activation code to the inactive device

*  Plug your iPhone into a computer that has iTunes on it.

*  Log into iTunes and back up iPhone to the cloud or your computer.

*  Restore iPhone to a new phone… initialize phone just like it’s a new one (i.e., chose language, what time zone, WIFI, etc.)… BUT — AND THIS IS KEY — do NOT enter your Apple ID, keep choosing options that bypass Apple ID.

*  Activate your account (in my case, I had to call Verizon).

*  Test that your phone can send & receive calls and text messages.

*  From a computer, log into AppleID.Apple.com.

*  Enter Apple ID and password.

*  Apple will try to send you your second-step authorization code to Message but that won’t work yet.  Click the “I didn’t receive my code” link and choose the “Send text message” option.

*  IMPORTANT NOTE:  Respond to any other text messages you see… because once you restore your backup, you will lose those newly downloaded text messages.

*  Enter code and from your computer and follow the links/instructions to turn OFF two-step notification.

*  Plug your iPhone into your computer and from iTunes restore your backup.

*  Activate your iPhone again (again, for me  with a call to Verizon)… which may require you to enter your Apple ID and password… but WON’T require Apple sending you an second-step auth code to an inactive phone!

There, I just saved you 10 hours of customer support misery!

Apple (AAPL) reports after the bell today.

Everyone expects a miss.  Lots of people have already significantly cut iPhone and rev estimates.  The stock has already fallen about 10% (correction territory) in just the last two weeks… so a lot of negativity is already priced in.

On the other hand, what’s NOT priced in are two biggies:

(1)  Apple is going to talk about what it’s going to do with its MASSIVE repatriated cash horde.

I think this is going to be stunning… since I believe it may be the LARGEST cash repatriation EVER for a corporation.

All kinds of stock-positive things will be discussed… like significantly raising the dividend… or massively increasing buy backs… and so on.

So this will be a positive.

(2)  The market is so totally fixated on iPhone that it sometimes forgets that Apple has other massive businesses, too… like services… like Mac… like iPad… and so on.  And like the rest of tech this quarter, I think those will surprise to the upside as well.

So, my thoughts are these:

The bad news about iPhone is already mostly priced in, which I think minimizes or eliminates the downside.

The good news about repatriated cash usage and all the other Apple businesses are NOT priced in.

So I tend to think they’ll be more of an upside surprise than not.  Which is counter to the way everyone’s going into this earnings call.  As a contrarian, that’s scary but what I like as an investor.

I remember the first Gulf War back in 1991.  The entire world was freaked out, including — especially — the financial markets.

Yet, the day we attacked, the Dow had one of its best days ever.

I remember hearing the phrase, “flight to quality.”  That is, when the going gets scary, the smart move to safe and trustworthy investments.

On that January 18th day back in 1991, it was IBM that people flocked to… IBM being, back then, the most important tech company on the planet.

Over the last few days, it’s been AAPL.

I think this puts a lot of the nitpicking criticisms of AAPL in appropriate perspective:  When the going is tough, the tough don’t hesitate to flock to Apple.

Lots of downgrades for Apple over the last few weeks.  The stock was spooked from a $180 level just two weeks ago to around $166 today.

It has nothing to do with the holiday quarter that Apple is going to report on tomorrow after the market’s close… that, people believe, will come in at record levels.

No, it has to do with how the iPhone X is selling this quarter.  Channel checks with suppliers indicate Apple is slashing its expectations of iPhone X sales this quarter… by as much as half

… which certainly seems like a huge let down given that the iPhone X is supposed to be the flagship product and the first iPhone to crack the $1,000 price barrier.

But… come on, people… did you really think a $1,000 iPhone X should sell in consumer numbers?  It’s not supposed to be a volume leader… rather, it’s supposed to be something exclusive and, quite frankly, unattainable for many.

That’s the whole point… to have a high-end iPhone entrant that (1) makes the device/technology more desirable, and (2) contributes in some way to an even higher overall iPhone family “ASP” or Average Selling Price (which is already the highest in the industry).

My guess is — since there are no negative reports on the iPhone 8 — that it’s not only selling well, but making up for any short-fall from the iPhone X… after all, if they’re not buying an iPhone X, they’re buying one of the other not-so-cheap models.

Additionally, don’t be surprised if some of Apple’s “smaller” businesses — like cloud & other services — make meaningful contributions, too.  Even the analysts that have raised flags on the iPhone X agree that last quarter should be pretty spectacular for the company.

And, finally, I always have to throw in the irrationality of the market:  Apple, one of the most stellar tech companies in the world according to any measure (even growth), has a P/E of 14.2 forward earnings… while the average company in the S&P 500 has 18.6.  If you’re looking at tech leaders, Google has a forward P/E of 28… and Amazon has — wait for it — 168.  Go figure.

AAPL has been beaten down so much by negative sentiment in the last few weeks that I think we might have a nice setup for a pop after earnings tomorrow.

At least, that’s what the contrarian in me thinks.

Long-time marketing/sales/tech guy Bill Campbell passed yesterday.

Not a lot of people outside Silicon Valley knew him… but everyone inside did.  Among his many business feats, he somehow managed to play significant roles at arguably the two most important — and competitive — technology companies in the world, Apple and Google… at the same time!  If ever there was a testament to how good Bill was — or how much influence he had in Silicon Valley — that’s it.

As significant, Bill was very active in the Sacred Heart community (where my daughter goes to school)… not just donating (which he did a LOT of), but participating, too… indeed, he coached a generation of “powder puff” girl football players.  Sadly my daughter will have missed the coaching-experience-of-a-lifetime by just a year.

I always chuckle when I think how I met Bill.  It was at a big Macworld party.  At the urinal.  Just two guys having a simple chat.  No stranger to a locker room, Bill was absolutely a guy’s guy.

I met with Bill in (ahem) a more professional environment when he took over the Claris division of Apple.  My T/Maker business partner Heidi Roizen and I pitched Bill on making our award-winning word processor, WriteNow For Macintosh, the upgrade to MacWrite.  At one point during the conversation Bill took us on a tour of Claris’ new headquarters… mostly empty because the spin-out was brand new… and mostly there were just IT and facilities folks walking around.  What impressed me about Bill was he knew everyone by name… essentially the “little” people… and true to his coaching reputation, high-fived several of them as we walked by.

He just seemed like someone you wanted to play for… err, I mean, work for.

Nothing came of the conversations, but we stayed in touch.  Bill asked me to serve on the board of Great Plains Software (eventually acquired by Microsoft) and, unfortunately, I was in the process of taking a company public and felt I couldn’t short-change my shareholders, things were so incredibly, incredibly hectic.  On top of that Laurie’s dad was in the process of passing away.  Reluctantly, and hesitantly, I explained all of this to him… and to my great relief he couldn’t have been more gracious — and supportive — in his understanding… it was easy to see why he was a true elder statesman.

Our paths would cross from time to time.  Ironically, about 25 years after my Claris meeting, I was cleaning out my basement and found an old WriteNow t-shirt… to which I proudly wore to the next sporting event at Sacred Heart.  As luck would have it, I ran into Bill… and without skipping a beat, he pointed at my t-shirt and laughed, saying something like, “it’s still going strong after all these years!”  Goodness knows he’s had a lot more important things on his mind between then and now… but it brought such a smile to my face that he remembered.

Here’s to someone who went strong for 75 years.  Rest in peace, Coach.

A report out from Drexel Hamilton this morning about AAPL… his rationale sounds familar!

===============================================

Drexel Hamilton analyst Brian White (formerly at Cantor Fitzgerald) initiates coverage on Apple (NASDAQ: AAPL) with a Buy rating and a price target of $200.00 (Street High)

White highlighted:

  • The sharp correction in Apple’s stock this summer represents an attractive entry point as we believe fears surrounding China are overblown, concerns around difficult iPhone comparisons are short-sighted and the appreciation for the implications of this transformational super cycle is surprisingly muted.
  • Trading at just 8.2x our CY:16 EPS projection (ex-cash) and well below the 14.7x for the S&P 500 Index, Apple remains one of the most undervalued technology stocks in the world.
  • In our view, Apple’s successful transition to a larger form factor iPhone with the iPhone 6/6 Plus is the start of a sustainable upgrade cycle that has already catapulted the company to the #1 position in China’s smartphone market for the first time ever during 1Q:15 and we estimate the company will gain share in the global smartphone market in 2015.
  • Despite a slowing economic backdrop, our recent trip to China further supports our view that Apple fever is alive and well across the country. For example, we believe Apple is planning a bigger push into Tier 3-5 cities (80-90% of China’s households) across Mainland China over the next 12-24 months and the country’s 4G network is only 12% penetrated.
  • We expect the next big iPhone market that could open up for Apple is India and we view the country at a similar stage as China was for Apple in 2010. With a population of 1.25 billion, India is similar in size to China’s 1.36 billion and enjoys a wireless subscriber base of 980.8 million users as of the end of June (source: Telecom Regulatory Authority of India).
  • For the first time in five years, Apple entered into a new product category this year with the launch of Apple Watch in April, marking company’s initial push into the wearable technology market. We believe Apple Watch will be a major hit this holiday season.
  • In our view, Apple is innovating like never before with entry into the first new product category in five years with Apple Watch, the launch of new services such as Apple Pay, an expanded effort in the TV market with the all-new Apple TV and investment in big, new industries such as the auto market that we believe could eventually lead to an “Apple Car”.

Readers know I think Apple unleashing 11 million programmers onto TV is going to turn TV as we know it on its head… similar to what Apple did to the cell phone industry.

But I was stunned how surprised — excited — I was to see the new Apple TV Remote.

Why?

Because Apple just figured out how to unlock using the next generation of TV.

The last time they did that was with the gesture interface in the tablet category (iPad).

The time before they did that with the gesture interface in the cell category (iPhone).

And the time before that with the “thumb” interface in the digital “MP3” music player category (iPod).

So, the new Apple TV remote is a big deal.

While there is no doubt that Apple’s iOS development platform — and the legions of loyal Apple programmers creating zillions of phenomenal, mind-blowing, and ultimately incredibly useful apps — is the heart & soul behind Apple’s device success…

… in each case there had to be a simple, elegant interface to be able to use all of that goodness.

Today TV remotes absolutely suck.

Do I really need to prove that?  Just look at what’s sitting next to your TV.  Probably at least three remotes… all necessary at various points… and all with dozens of buttons that are impossible to use during nighttime viewing.

That is, unless you get one of the many universal remotes… which I swear are all harder to use than flying a small airplane.

It’s like using a PC… when all you really want is a Mac.

So from what I can tell from the announcement yesterday, Apple — once again — cracked the code on a huge new market.

They didn’t do it with some weird, “Minority Report” in-the-air, be-careful-if-you-sneeze-because-you’ll-change-channels interface.

They did it the Apple way:  Simple.  Elegant.  Useful.

As Tim Cook said, “The future of TV… is apps”… which is true…

… but what’s going to unlock that future is the new interface Apple just created, the new Apple TV Remote.

No one is really talking about what could potentially be MIND BLOWING at tomorrow’s big Apple announcement.

Sure, lots of talk about the next rev of iPhones.  And bigger iPads.  But Apple TV is relegated to back-of-the-bus stuff.

Why?  Because everyone had been expecting either (1) an actual Apple TV set, or (2) that whole “skinny” bundle cord-cutting thing… so they’re all somewhat disappointed.

But I think — rather, I’m hoping — everyone has it wrong.

And that is that Apple has created a product that will let Apple do to the TV experience that they did to the cell phone experience… and that is completely redefine what we expect from TV.

How will they do this?  By announcing “iOS TV”… essentially unleashing their 11 million or so iOS programmers on TV.

That would change the face of TV as we know it.

It’s been a really long time coming (here and here).  But, in about 24 hours, we could be saying once again, “Do you want to do this with your TV set?  Yep, there’s an app for that!”

Another oblivion morning… first five minutes were hell… I think the largest interday drop for the Dow ever.

To the point I was making in my, “Investing Is Easy, eh?” post this weekend… about it not being as bad for Chinese consumers as the headlines say… which means it’s not as bad for AAPL as the headlines infer:

Tim Cook made a rare statement about his business in China this morning.

“As you know, we don’t give mid-quarter updates and we rarely comment on moves in Apple stock,” Cook wrote. “But I know your question is on the minds of many investors.”

“I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.”

“Obviously I can’t predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge,” Cook added.

However, I think Tim Cook did more than put the China situation into perspective for AAPL investors…

… I believe he may have single-handedly stabilized a global meltdown.

Wow.

Right.

Not for the faint of heart.

On days like Thursday and Friday — where the market was pounded into oblivion — it’s good to take a step back and test popular thinking.

There are two themes driving the market:  China and oil.

China

China is slowing down.  Which businesses are affected?  Certainly the infrastructure businesses.  The fall out?  The commodity free fall.  (Yet another thing pressuring oil downward.)  What about Chinese consumers?  Not so much, China is still growing at 6-7% — considered hypergrowth for just about everyone else — so obviously the Chinese working class is still benefiting.  Remembering that the ills in the Shanghai stock market only affects 1 in 10 Chinese consumers… which (I’m concluding something obvious for emphasis) leaves 9 of 10 unaffected by the volatility… and I suspect consumer spending in China probably feels like Silicon Valley restaurants during the last two stock market crashes:  Still packed.

Oil

Oil is going down, which some people think is bearish because they believe it’s an indication that the world has stopped growing.  I won’t say that’s a good thing…

… but cheaper energy prices means more money in everyone’s pocket… which means everyone can buy more things… like highly desirable iPhones and such… and that means higher corporate profits…

… which is a great thing.

So, weird to me that people are weirded out by falling oil prices… that’s something to celebrate.

BTW, falling oil prices are less a function of lessening demand and more a function of greater supply.  We’re producing more than the world needs right now, no wonder oil prices are coming down.

More Responsible At Home?

On top of all of this, U.S. consumers seem to be acting more responsibly… check a news item that seems to have slipped through the cracks on Friday:

The national average FICO score is now 695 — the highest it has been in at least a decade, according to the latest analysis from Fair Isaac Corporation, the score’s creator.

In Summary

I disagree with the major themes driving the market.

The Chinese consumer isn’t history.

Lower oil prices are good for everyone except for those in the oil business (sorry oil business!).

And, as painful as it is to say, blowing off steam isn’t the worst thing in a bull market that’s lasted as long as this one… in fact, it’s kinda healthy.

People are weirded out because the iPhone “lost” its marketshare leadership position in China.  (Here.)

But are high-end products really supposed to be marketshare leaders?

I think not.

There’s not a business school prof or business textbook in the world that thinks so, either.

What investors should be focusing on is not that Apple “lost” their #1 marketshare ranking…

… but rather how utterly amazing it is that the high-end supplier in the market is anywhere close to the #1 ranking…

… especially during their OFF-CYCLE!

Now that speaks to the phenomenal momentum Apple has in China.

I can’t understand why AAPL recently touched $110 and isn’t instead cruisin’ up to the $140’s by now.

I mean, I intellectually understand why people might be worried about China…

…. but not really…

… the China stock market “crash” happened so fast I can’t believe anyone actually noticed.  Even with the crash, the market is still up about a third year-over-year, so most investors (as opposed to traders) are still holding on to nice gains.  But to further minimize any effect on the Chinese consumer, 90% of Chinese households don’t even own stock.

On the other hand, there are some pretty irresistible AAPL drivers right now, including:

  •  AAPL has a consensus P/E of 12.7 vs. 17.7 for the S&P… however, Apple is increasing EPS a whopping 45% vs. a paltry 7.9% for the S&P… hardly seems fair, eh?
  • AAPL has upgraded only 27% of their existing iPhone installed base… which gives them a lot of room for continued organic growth
  • AAPL still has very large external targets, though… for example, India… and a bunch of unhappy Android users
  • Oh, yeah, AAPL has other billion dollar products, too
  • AAPL may be set to release iOS TV… which could do to the TV biz what the iPhone did to the cell biz… which is, of course, completely turn a huge, massive industry on its ear
  • AAPL has more money in the bank than, well, everyone

.

All of which is why — with full disclosure! — I’m back on the AAPL bandwagon.  <smile>