By Courage & Conviction Investing From Seeking Alpha

Summary

On August 11, 2015, I did the unthinkable – I published a negative Apple article on Seeking Alpha.

At the time, AAPL was trading at $119.

In that article, I specifically said FY16 consensus estimates of $245 billion in revenue of $55.8 billion in earnings appeared too high.

Before Tuesday night’s big earnings miss, Wall Street consensus FY16 revenue estimates were $227 billion and earnings were $50 billion. These estimates will come down further.

After having reading one too many bullish Apple (NASDAQ:AAPL) articles, I decided an update piece to my original bearish/cautious Apple article was poignant: Are iPhone Margins Sustainable? Seeking Alpha published the original article on August 11, 2015.

Incidentally, it appears my thesis has been proven correct, as consensus estimates were too high in early August 2015.

 

As of Tuesday night, FY16 consensus estimates were calling for $227 billion in revenue and earnings of $9.03 per share. With 5.54 billion fully diluted shares in Apple’s float, $9.03 consensus earnings would equate to $50 billion. Lo and behold, my view that FY16 estimates for both revenue and earnings were too high has been proven correct. Moreover, outside of the significant weakness in China, the biggest shock for the bulls may have been that Q3 guidance called for $47.24 billion in revenue, yet Apple guided revenue in a range of $41 to $43 billion. Where I am from, $5 billion in a quarter is material.

Source: Yahoo Finance

Here is a snapshot of Apple’s FY16 Q3 revenue guidance.

Source: Apple

The forces of gravity have asserted themselves. A key piece of my bearish thesis was that the ASP and unit growth for the iPhone were unsustainable, especially in China. As we can clearly see, YoY Greater China revenue was down 26%. As I argued then and still argue today, for the average Chinese consumer, the ASP for an iPhone is way too high as a percentage of their disposable income. Moreover, there are lots of formidable competitors, notably Xiaomi (Private:XI), willing to offer a handset with great components as well as sacrifice margins to win/maintain market share.

Although, Apple is very guarded sharing detailed results, at a high level, we can see the drivers of sales decline.

(click to enlarge)

Now I am sure I will receive lots of negative commentary telling me about Apple’s low P/E ratio, its $200 billion in cash and the iPhone 7. My point in August 2015 and my point now is that Apple is the most widely covered stock on Wall Street. The best and the brightest from the storied Ivy League institutions cover the name. Everyone in the world knows Apple has a low P/E ratio, so this mere fact alone equates to “magically thinking.” A low P/E ratio will not somehow give investors an edge.

I am not suggesting that Apple isn’t a great company, and of course, I am fully aware of its great ecosystem, but I have read far too many glowingly positive article here on Seeking Alpha as well as other sites that are simply blind faith-based.

Here are two articles I cite as examples of magical thinking.

Now let me be clear and forthright, I have made plenty of bad calls over my career. Making investment mistakes are par for the course. It is almost a full time job to have the bandwidth to really understand how consensus estimates are derived, model earnings, and have the vision to anticipate the future. It is a skill very few people are blessed with and have the dedication to hone. Even the hedge fund Masters of the Universe get it wrong.

Perhaps, the iPhone 7 will be revolutionary and Apple’s most auspicious product launch. Candidly, I have no idea and anyone who does is fooling you. I point these articles out as I don’t want investors to blindly re-mortgage the house to buy Apple at $96 because they think it is a can’t miss bet with a low P/E ratio.

Finally, let’s look at valuation. Apple has $177.6 billion in marketable securities and $20 billion of positive working capital. However, we have to back out $69.3 billion in long-term debt. So Apple’s net cash balance is closer to $128 billion, not the $200 billion figure loosely cited in the popular press. Next, we have to discount that cash by 35% as it would have to be repatriated.

So at $96 per share x 5.54 billion shares less call it $100 billion in cash, we are looking at an enterprise value $400 to $430 billion depending on how you think about tax rates. I personally am not enticed to buy shares of Apple given the significance of last night’s miss, but my broader point is that SA investors need to think twice before going all in Apple in the high $90s. I know that I miss Steve Jobs’ vision and imagination as I haven’t seen much new product innovation during Mr. Cook’s reign.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

For more on this story go to: http://seekingalpha.com/article/3968564-apple-blind-faith

IMAGE: www.cultofmac.com

Related story:

Apple shares plunge 7% on first drop in iPhone sales ever

By Jon Swartz and Marco della Cava, From USA TODAY

Apple shares are down 7% after they released disappointing March quarter results.

SAN FRANCISCO — Apple’s streak of iPhone-powered sales ended Tuesday when the company reported its first quarterly sales drop in more than a decade.

The news sent Apple’s (AAPL) stock into a tailspin with shares plunging more than 7% to $96.85 in early trading Wednesday.

CEO Tim Cook signaled a saturated smartphone market would keep a lid on sales, although he suggested the company’s new entry-level smartphone, the SE, promised to eventually goose sales among Android switchers and in emerging markets such as China and India.

“The SE is attracting two types of customers, who want the latest tech in a more compact package, and there are more than we thought in that category. And those who want an iPhone but couldn’t afford the entry price (before),” Cook told analysts. “We’re excited where this can take us.”

Sales dropped 13% to $50.6 billion Apple said late Tuesday. Profits were $10.5 billion, or $1.90 per diluted share, down 22% from $13.6 billion ($2.33 per diluted share) last year.

Analysts polled by S&P Global Market Intelligence expected sales of $52 billion and a profit of $2 per share.

The disappointing quarter can be summed up in two words: iPhone sales. Apple sold 51.2 million in the quarter, down 16% from the same period a year ago. It’s the first year-over-year decline in Apple’s franchise product since it debuted in 2007.

 

“The company relies on iPhone sales not only for profit but also to extend their ecosystem,” says Gartner analyst Brian Blau. “By any measure a $10 billion profit in a quarter would be great performance, but for Apple that high level is simply getting by.”

Cook signaled that the company remains optimistic about its ability to capture new customers in emerging markets. In China, Apple has now opened 35 stores and expects to open five more in the coming months, Cook said on the analyst call. In India, the gradual adoption of high-speed LTE networks will “unleash the power and capability of the iPhone in the way a 2G network would not do.”

Apple’s first year-over-year quarterly sales decline since 2003 hammered its stock in after-hours trading Tuesday and fell further as CEO Tim Cook and other analysts talked. (Apple announced its results after markets closed.)

Apple did have some good news for investors. The company’s board approved a $50 billion increase to the capital-return program for shareholders. The world’s most valuable public company plans to spend an aggregate of $250 billion in cash by March 2018.

Separately, the board said it was increasing its quarterly dividend 10%.

The bumpy second-quarter results could be the start of a rocky ride for the iconic company, which faces tough year-over-year comparisons in the June and September quarters, according to S&P Global Market Intelligence.

Apple said Tuesday it forecasts $41 billion to $43 billion in fiscal third-quarter sales, far short of Wall Street estimates of $47.3 billion. Consumers have not snapped up the latest iPhones, the 6S and 6S Plus, because they aren’t much different from previous models, analysts say.

Things should pick up in the December quarter, analysts predict, after the expected release of what could be an iPhone 7 in early September.

IMAGES: AFP 544795165 A CIT USA CA In this Sept. 9, 2015, photo, Apple CEO Tim Cook introduces the iPhone 6S during an Apple media event in San Francisco.
(Photo: JOSH EDELSON, AFP/Getty Images)

For more on this story go to: http://www.usatoday.com/story/tech/2016/04/26/apples-poor-results-highlight-diminished-iphone-demand/83388452/