Archive for the ‘iPhone’ Category

(NOTE: This article was published in Seek Alpha on April 19, 2022, sorry for my delay posting it here!)

SUMMARY:

  • Skillz (SKLZ) announced significant operating changes during their Q4 2021 earnings call, including material cost cutting having to do with ineffective marketing spend.
  • Cost cutting is critical.  But as important is cutting their excessive fee structure (i.e., their “vig”).  Because their problem isn’t getting betting players, but rather keeping them betting.
  • Reducing their dispiriting 50% betting fees to the industry standard 10% won’t affect revenues and could be key to creating sustainable profitability, possibly 1-2 years ahead of guidance.
  • I have a Strong Buy recommendation on SKLZ.
Thesis

Skillz (SKLZ) announced major operating changes in their Q4 2021 earnings call, including material cost cutting having to do with ineffective marketing spend. This cost cutting is critical. One doesn’t need to look past their Q4 2021 P&L results to figure this out.

But even with cost cutting, bears think this situation is unfixable.  That a lot of their revenues were due to “free money” promotions and cutting these will cause revenues to plummet and the company to still crash and burn.  Certainly the current share price reflects this.

But, tactically, the situation has a straightforward fix. Simply reduce the vig — that is, the fees Skillz charges bettors — from their current (and dispiriting) 50% to the industry standard 10%.  Change the vig, change the world.

Bears will counter getting less vig would cause revenues to drop even faster. But they won’t, because when you run the numbers, nothing happens. Well, check that, something important does happen: The revenues become recurring and sustaining.

For my first look at SKLZ, I wrote an overview piece on the company explaining why it was woefully misunderstood and undervalued and tagged it with a “Strong Buy” (and still have that rating). I did so because the company has just too many things going for it to be trading near gross cash levels, including scalable technology, sophisticated infrastructure, a large, established base of paying and non-paying players, a deal with the all-powerful NFL — and now the wildly-popular UFC — partnerships that are sure to attract other top brands, and 3/4 of a billion in gross cash in the bank. But most important for a growth company in this market: An achievable path to profitability.

But it doesn’t have profits right now, which is what the market wants to see. This article examines Skillz’s cost cutting in more detail and its potential effect on profitability, including ways to accelerate profitability 1-2 years ahead of guidance.

Understanding The Other Two Important Numbers In SKLZ’S P&L

Certainly revenues and profits are important numbers in any P&L. But what drives those numbers? And in particular, what drove the gaudy $155 million Skillz spent on Sales & Marketing in Q4 2021?

Two things: $85.6 million on New User Acquisition… and $56.7 million on Engagement Marketing. As the company acknowledged, “Candidly, we spent more than we should have in both user acquisition and engagement marketing in Q4”.

User Acquisition marketing costs in Q4 2021. (Skillz Q4 2021 Investor Day presentation materials.)

Engagement Marketing costs in Q4 2021. (Skillz Q4 2021 earnings press release.)

The company is now committed to cutting User Acquisition and Engagement Marketing costs.  Which is great and needed news.  But the relevant question is why did Skillz feel the need to spend all that money in the first place?

Of course there was great pressure to continue growing its player base.  Like many companies, Skillz was simply offering customer incentives in an effort to kick-start players… the same way it did all through 2021… only accelerated in Q4 in an effort to end the year with a bang.

However, what it really was doing — what it has been doing for a long time now — was trying to make a premium but non-standard fee structure work.  While throwing gobs of money at players did accelerate the top line for many quarters, the “easy money” environment was also distracting from what was happening to the bottom line: Trouncing it. 

Every company needs to incent customers, but after spending nearly half a billion on just marketing in 2021 — compared to less than $400 million for all of 2021 revenue — Skillz now has more than enough proof that its old approach doesn’t work.  Let’s talk about why.

Engagement Marketing That Didn’t Stand A Chance

I’ve always loved the old joke, “The beatings will continue until morale improves!” It kind of reminds me of Skillz pushing “promotional cash” at players and, like the joke, no matter how much promotional cash Skillz doled out, it just wasn’t improving the bottom line.

That’s because it’s not the amount of promotional cash that’s the main issue — that actually did a fine job getting players to open their wallets (as unnecessarily excessive as it was). It’s Skillz’s vig — their commission — that’s chasing away paying players once they start betting. It’s way too high.  Impossibly high.  It’s literally that simple. Change the vig, change the world.

Let’s review: The betting action in a Skillz game — for example, their new NFL 2-Minute Football — is intoxicating… addictive… exactly what you love to see in a legal vice investment. SKLZ is ringing the cash register twice every 60 seconds. Each player wagers a standard $0.60 “entry” fee and Skillz rakes $0.20 every game play. Betting players play on average almost a couple dozen games a day, so the games — and fees — add up fast.

Wow, sounds great if you can get it! But that’s the problem, Skillz isn’t getting it for very long. This is what a Skillz wager looks like to anyone that understands betting — like every NFL and UFC bettor in the world:

Standard bookmaker “vig” vs. Skillz. (The Lone Contrarian’s calculations.)

That graphic says it all, eh? It answers a lot of questions important to the success and/or viability of the business, for example:

Q: Why aren’t players buying in more (i.e., recurring revenue challenges)? 

A: Because it’s impossible to win when the house is taking 5x the standard % rake.

Q: Why was Skillz’s Engagement Marketing “free cash” promotions ineffective in incenting players to buy in again? 

A: Because whether I play with my money or their free cash, I’m going to stop betting once the money’s gone.  Impossible to win.  One and done.

Q: Why does Skillz have so many non-paying active players? 

A: Because players love their games, but not their fee structure… so when they’re done getting hit over the head with a 5x vig, they just continue playing for free. If you are a Skillz player, you know this to be true.

But this is easily fixable: Just change the vig.  That simple.  Change the vig, change the world.

Bears are probably screaming now, if you change the vig from 50% to the standard 10%, revenues will crater!

This is why I believe bears don’t really understand this company. That isn’t the way betting works.  That isn’t the way mobile gaming works.  That isn’t even the way the numbers work. Run the numbers, nothing changes. The revenues stay the same. Well, check that, something important does change, the revenues become recurring. The golden ticket to a sustainable business.

Let’s quickly look at the math: With a 50% vig (what Skillz has today), a $10 buy-in, and evenly-matched games, a bettor playing the $0.60 “Regular Season” game will win $0.40 half of the time and lose $0.60 half of the time. That’s an average loss of $0.10 every game. So $10 buys you 100 plays, not even a day’s action for some players.  And at the end of those 100 games, the house’s take is $10. Because the vig is so high — and it becomes apparent that it’s impossible to win — players don’t buy in again. But they do keep playing for free.

If we change the vig to 10%, guess what, the house’s take is still $10. The only difference is it takes more games for the house to earn the same amount of money… but — and this is the critical piece to understand — these are games that are going to played anyhow whether they’re betting games or on the free practice field… as evidence by Skillz’s sky-high 84% active-but-non-paying player percentage.  Changing the vig won’t even affect the performance of their network… because Skillz is already serving these games.

50% Vig vs. 10% Vig: The house earns the same either way. (The Lone Contrarian’s calculations.)

I’m sure Skillz was hoping it could charge a premium.  After all, what they’re doing is so new.  And exciting.  But it’s just not working.  Bettors know better.

Skillz seems to have forgotten the basis of what I consider its break-through business concept:  Instead of just making mobile games and struggling — like the zillions of other aspiring game developers — to charge for game play, they tried to solve that problem for the entire industry by creating a development platform that positioned game play as something brand new in gaming: A legal wager. Brilliant! 

But critical to that concept: A bettor wants to win money.  That’s why they’re betting.  But it’s virtually impossible to win against Skillz’s 5x rake in an evenly-matched game. Almost all of the players always lose.  And quickly.  So it can’t be anything else but one and done.  Because betting may not be the smartest thing to do, but even the craziest of bettors figure out when the deck is stacked so completely against them.

So Skillz built a fantastic company with fantastic technology and a fantastic infrastructure, all based on a brilliant idea, and they did all of that and then spent a huge amount of effort and time and cash just getting a player to the money table… only to… what?  Chase them away to the free games because of an impossible 5x rake?

It’s time to share the key insight here: Skillz players want to bet. They just invested a lot of time becoming hot stuff at a Skillz game.  All SKLZ has to do is not stack the deck against them.  Give them a standard vig — one that every bettor is used to — and one that’s been in use since betting was invented, a vig that every bettor thinks they can overcome.  If I don’t feel like the deck is stacked against me, I like to compete (that’s why I’m playing video games in the first place) so I’ll buy-in again… because playing for money is just more fun than playing for fun. Buying in again… and again… and again… is the very definition of healthy recurring revenues (as ironic as that may sound :).

The good news is Skillz can easily change their vig — without affecting revenues — literally overnight.  And the $56.7 million they spent on Q4 Engagement Marketing?  Most of that gets saved overnight, too.

From a revenue point-of-view, there’s another enthusiastically welcomed upside: SKLZ has 3 million active, non-paying players… and many might love to bet again if said deck wasn’t stacked against them. Bringing a big chunk of those 3 million active, non-paying players back into the betting fold would put a JOLT into revenues, eh?

But also MONUMENTALLY important:  Skillz must lower the vig before the mass of NFL bettors enter the picture. The sooner the better.  Because NFL bettors are savvy and won’t stand for paying a 5x rake. The NFL opportunity will otherwise be D.O.A. and Skillz will have snatched defeat from the jaws of victory.

We Don’t Need No Stinkin’ New Customers
Skillz Monthly Active Users exited Q4 2021. (Skillz Q4 2021 earnings press release.)

(* A nod to Mel Brook for a variation of a famous quote from his 70’s classic, Blazing Saddles. : )

Why did SKLZ spend almost $86 million on new customers when it has about 3 million unmonetized players — players who love their games enough to still play actively? They might have also forgotten that the easiest customer to get is an existing customer.

Let’s put this in perspective: If they figure out how to get 1-in-5 to pay the average, they could double revenues. Organically. Sustainably.  As suggested above, changing the vig can do this all by itself (and more). Change the vig, change the world. But there’s more revenue to be found here.

Because while this may sound odd to bettors, there are some people that don’t want to bet… they only want to play free games. So figure out how to make money from their free play.  It’s not like that’s new or anything, much of the mobile gaming industry already relies on monetizing free play. For example:

* How about that time-tested approach, having players watch a rewarded video before a free play? (Maybe give them a 30-day grace period, get ’em hooked, then start showing ads.)

* And that other time-tested approach, paying a cheap monthly subscription so you don’t have to watch ads. This is the subscription generation after all.

* In your multiplayer games, how about selling game skins, Leaderboard animations, dances, badges, and such? That seems to work nicely for free games like Fortnite.

* Even something as trivial as a tip jar can turn out to be a revenue contributor.

But maybe as important: How about creating new kinds of money games… designed to attract non-bettors?

Maybe enter a $1 non-bracketed tournament that happens every hour… where I can play 120 other evenly-matched competitors.  We all play three games and the top 10 averages divvy up $100… spreading it out a little bit just creates more excitement, happiness, and engagement.  Maybe the next 10 participants get Ticketz (Skillz’s virtual currency)… and  — as all gamers know — there are bragging rights for making a Top 20 Leaderboard.  As a player myself, I love those odds for a buck. I just took a break from writing this article, played three games, and kicked butt.

How about a “Daily Subscription Tournament”? Pay $9.99 and your subscription gets you into a month of daily non-bracketed tournaments — that’s just $0.33 a day. Same as above, everyone plays three games, but the top 10 averages divvy up $1,000 and the next 90 participants get Ticketz.  More bragging rights, happiness, and engagement.

Feel free to shorten the $1 Tourney cycle time, or run a different Subscription Tournament for each hour of the day as participation dictates.  By holding these daily tournaments, you just know I’m going to be on the free practice field a lot, so that supports the other monetization techniques discussed above, too.

With over 3 million active, non-paying players, Skillz doesn’t have to look beyond its own registration list to get new paying players. And shouldn’t. If for no other reason, they could have their hands full with new players come this fall when their NFL partnership kicks in. Right now, though, keep cutting most of your $85.6 million User Acquisition spend, it’s not needed. This literally could turn the entire quarter around by itself.

So What Does This All Mean For The Numbers?

Glad you asked. Here’s what 2022 Q4… Q3… or even Q2 could look like:

Back-Of-The-Envelope P&L Projections for SKLZ in some quarter of 2022 based on the actions suggested in this article. (The Lone Contrarian’s projected calculations.)

Same Back-Of-The-Envelope P&L Projections as above but without interest expense. (The Lone Contrarian’s projected calculations.)

Assumptions:

* Baseline revenues are Q4 2021’s RAEM (Revenue After Engagement Marketing) and to be conservative I assume no increase (vs. Skillz guidance of “above 30%” growth). Recall that this metric is essentially “net revenues,” i.e., doesn’t include any promotional money in the tally.

Reducing the vig means getting to invite past betting players to wager again. I’m assuming 1-in-5 will try their betting hand again… remember, these are players that want to bet again. So that doubles revenues to $104 million.

I am not, however, including any other recurring buy-ins, digital advertising revenues, newly created cash games, or any revenues from the NFL partnership. Note: I am not including these because the goal was to see the effect of cost-cutting activity on profitability.  Clearly, though, I feel strongly that all of these efforts can drive additional, significant revenues.

* I’m using costs from the December 2021 quarter as a baseline.

* Revenues are decreasing from Q4 2021 but we’ll still keep Cost of Revenues at Q4 2021 level.

* Baseline costs include a 10-15% increase in employee compensation, New User Acquisition cut by 80% (and, per company comments, Aarki to save 30% on the remaining 20% that is being spent), and Engagement Marketing cut by 80% (and Aarki again to save 30% on that remaining 20%, too).

* The company recently registered almost 16 million additional shares.

* I added $7.7 million per quarter for their Dec 2021 $300 million financing that carries a 10.25% interest rate.

* For this back-of-the-envelope exercise, I’m not including any “Change in fair value of common stock warrant liabilities”, “Other income (expense), net”, or “(Benefit) provision for income taxes”.

What’s It All Mean?

Profits!

OK, to be clear, it’s back-of-the-envelope and just $0.003 per share for whatever quarter they decide to change their vig, which isn’t even rounding error to a penny. But given that the average Wall Street analyst is predicting a loss of about -$0.15 per share per quarterany profit should quiet those that believe the company is going to run out of cash soon.

As important: Without their big interest payment, they have a profit per share of $0.02.

Fun to think what adding more recurring revenue (especially from the 3 million active but currently non-paying players), digital ad revenue, revenue from newly created cash games, and NFL revenue (!) can do to SKLZ’s top line.  Jumps by leaps and bounds, as does its bottom line.  But that is for a future article. 

But it all starts with reducing the vig. Change the vig, change SKLZ’s world.  In this case, the results could be moving up profitability guidance 1-2 years.

I like the Skillz exec team and for all I know they’re way ahead of me with all of this. Or have figured out an even better cost-cutting and monetization approach. But what I wanted to illustrate in this article is with just a few easy levers pulled, we can already see a dramatic difference to SKLZ’s bottom line in a short period of time.  It’s why I continue to think this company is woefully misunderstood and undervalued.

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.

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.

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.

I’m a contrarian. It’s my observation that when everyone thinks one thing, the real, outsized opportunity is the other.

But what happens when everyone thinks one thing… but the market is thinking quite another?

Take AAPL. From a low of around $212 a month ago, it’s powered its way to almost $290. More impressively, just about 12% from its all-time high.

Heck, if you went way out on a limb, you could probably say that’s even within a normal trading range.  “Has the whole world stopped?  We didn’t notice!”

But all through this romp upwards, most Apple analysts have been decidedly negative.

Out of about 30 analyst moves in the last two months, a whopping 80% of them were downgrades.

To put this in context, Intel analysts were split 50/50 between upgrades and downgrades going into their earnings last Thursday.  So, relatively speaking, 80/20 to the negative side is a big spread.

 

 

As important, some of the AAPL downgrades were double downgrades… that is, a second price-target cut within just a few weeks.

So what’s the contrarian play here? Go against analysts and buy?  Or go against the market and short?

I think you go against the market. That’s the bigger “everyone” in this case.

Going against the market also seems, well, more rational to me.  I love Apple but I think the current market enthusiasm seems excessive given our uncertain environment:  Uncertain when lock-downs will end… uncertain that people will want to congregate at Apple Stores when they do… uncertain when we’ll see a vaccine… uncertain that a 2nd, or even 3rd, inflection wave may hit… and so on.

This uncertain environment is awesome for a select number of businesses… say Amazon and Netflix… but could be less kind to a (mostly) consumer hardware company like Apple.  Not that I’m not saying people can live without their iPhones — they can’t — but I am saying they may be less quick to buy $1,000 upgrades.

No doubt, what makes going against Apple scary is it’s one of a handful of companies that has the business levers to manage its way around a crisis like this.  And they are notorious for pulling rabbits-out-of-hats.

Still, a V-shaped recovery?  THE ENTIRE WORLD HAS SHUT DOWN.  Does a (mostly) consumer hardware company merit trading anywhere near an all-time high?  Does the market merit trading anywhere near an all-time high?  Somewhere in this equation there has to be some p-a-i-n.

I’m not the first person to say there’s a good chance we’ll see another downdraft.  So if Apple does surprise to the upside, AAPL could still take a tumble along with the rest of the market.  Nice to have a backup scenario in this situation.

P.S. A couple of other quick AAPL trading comments:

  • While Apple has done a terrific job moving into services, these are still only about 20% of company’s revenues. Meaning, Apple is still mostly a hardware company.
  • Intel, also a hardware company, has had a similar run-up as AAPL. Last Thursday INTC blew away their numbers, benefitting from the Coronavirus “work at home” situation. Apparently, with mobile being such a huge focus the last few years, home desktop machines have been ignored and needed updating.
  • In contrast, you don’t need to upgrade your iPhone to work at home.
  • One last data point: Even though Intel blew out numbers, INTC finished flat for the day.

Everyone is weighing in on Coronavirus prognostications.

I will try to keep mine to just the ones I feel are fairly unique.

My theme?  We couldn’t be better prepared for exactly the crisis we’re going to be going through.

*  This isn’t like the last two great crashes.

The 2001 “Dotcom Crash” was based on massive valuations with zero profits — and in many cases, zero revenues.

The 2008 “Great Recession” crash was based on artificially pumped up real estate prices, not real productivity gains.  (It was also exacerbated by skyrocketing oil prices, due to political, not fundamental, issues… and had twice the unemployment we have now.)

Whatever we’re calling 2020 — The Corona Crash? — we’re starting with real businesses, with real revenue growth, making real profits, involved in real productivity gains, historically low unemployment, and extraordinarily low oil prices.

In other words, we’re already starting with a much stronger hand.

*  Ironically, many of the productivity gains of the last decade involve remote technologies, i.e., letting employees work from home, ordering pretty much anything online, and, as important, socializing from a far.

So, in many ways, the last decade or two has been great practice for this exact situation:  Remote working, remote living, and social distancing.

*  Not only are the remote technologies in place, but the entire millennial generation prefers to socially distance.

Half the time millennials have their heads buried in their phones — even when they’re sitting right next to each other.  So do you really think they care whether they’re in the same room or a different state?  Not at all.

*  While older generations panic about bailouts and handouts and such, the entire millennial generation knows nothing but bailouts and handouts.

So do millennials think we’re in a crisis?  Absolutely not.  Feels pretty normal to them, like it’s just something we go through every once in a while.  What’s the fuss?

*  And finally:  The market needed to be popped.  Markets aren’t supposed to go straight up, like they did almost the entire month of February.

So we’re down 20%?  I can easily make the case we were 30% overvalued.  Because markets aren’t supposed to go straight up.

I’m not saying it’s not going to be rough, but I am saying we seem to be particularly prepared for this crisis.  It’s like a lot of what we need to do is already done.

We’ll see.

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.  :)

Was looking at some product info and it started out with possibly the best description of kids and parents I’ve ever read:

Kids, especially teenagers, are astoundingly moronic, impulse driven idiots that are typically completely ignorant of their own mortality who spend their time traveling in packs looking for opportunities to trump each other’s stupidity.

Parents, especially American ones, are overwhelmingly paranoid, obsessive, overbearing blowhards that misidentify harmless coming of age behavior and experiences as threats to their child’s well being while ignoring real threats to their mental and physical health such as television and run-amok consumerism.

Painful but true!

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.

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.