2013-01-24

$AAPL : Don't count on the boom from the cash pile.

Why AAPL cash pile will not be enough to bring it to former glory.

How AAPL is a "value" stock and not a "growth" play. 

Disclosure : Last legs of shorts running on trailing stops as per this post.

After a record quarter last night and subsequent after hour crash of nearly 10% (I see a quote of 464 just now, having touched a low of 457 earlier) it is not entirely surprising that the internet and social streams are filled with $AAPL news. Visit social sites for traders and you are bound to find many traders and investors plainly disgusted and disappointed with the results so far. AAPL is present in almost every single active trading account in US. It has long been a hedge fund darling for sometime and main driver of alpha (over performance over benchmark) and therefore a source of popular trade - long AAPL short SPX. This trade is unwinding for a long time.

For a long time AAPL has been transitioning into a normal value stock and growth side is dumping the stock with both hands as nicely explained here. Also typically the growth players are also the ones with stock on margin and such moves accentuate the squeeze because every down move results into margin call and every margin call results into more selling. The value side is not able to absorb the supply to the full extent as the stock has not yet reached those value propositions. I have long subscribed to the view that the AAPL is going MSFT way after hitting the title of "most valuable company on the planet". It is simply too big. You cannot grow a "too big" company bigger by 50% each year year on year (those who believe the same for AMZN are likely to be disappointed soon).

After having punched the AAPL December 2012 quarter end number in my simple spreadsheet model, here is what I see.

  • AAPL annual year on year growth has been averaging 50% plus for 3 years. On trailing 12 month basis it is now 5%. i.e. Top Line is not growing.
  • AAPL net income is maintaining a healthy 25% margin and I would expect it to stabilise in 20% area going forward. This is a good value stock but not sign of a company growing leaps and bound. i.e. Bottom Line is stable not do not expect rising profit margins. 
  •  On trailing 12 month basis the stock is on PE of 11 which is reasonable for a value stock.

If I assume a 5 year investment horizon, with 5% revenue growth and 20% net margin and PE of 11 after 5 years and on a 10% discount factor, I get current value of the share at 305. You might like to point out the growing cash pile of 137 bln and what AAPL can do with it (things like buying NFLX, RIMM or entire European banking sector or possibly an entire country with its own central bank and license to print money). I feel AAPL is not going to do much with this cash pile the same way MSFT could not. A part of it will be dithered away on fruitless projects (Apple Map anyone?) and part of it will be forced to go for share buyback/dividends as the disgruntled shareholders start becoming thorn in the side of the board, CEO and CFO. Assuming AAPL spends the entire sum on buying back Apple shares at average price of 400, even then the fair value from my assumptions come to 480. So overall, it is not very exciting at current price levels. 

Of course my model is not scientific. It is not even a good model (I have been calling AMZN crash for sometime with only stop losses to show). I trade price action not fundamentals. However what it does show is to put some perspective around AAPL and to show that to reach the former glory and 705 highs, Apple has a tough fight at hand. There will be buying opportunities for trading along the way when over leveraged accounts are forced to exit but I would expect them to be short lived until the trend changes to long side. Until then accumulate for dividends or value at reasonable levels but do not expect to turn $10,000 invested in AAPL to become $700,000 in next 10 years

You can read my other AAPL posts here