Stock Watch

Apple Inc. (AAPL) – Time to buy or sell?

Apple Inc. the world largest company by market capitalisation is making investors scratch their heads as the recent price slump continues. The stock closed down yesterday at $542.83, which begs the question should I take profits or expect a reversal of this correction? Let’s take a look at what’s commanding these price movements.

Overvaluation?

Back on Sept 21st 2012 the stock reached a record high of $702 making Microsoft’s’ founder Bill Gates turn in his chair as Apple surpassed Microsoft to become the world’s largest company by Market Cap. The hype and speculation that came with the new IPhone 5 created frenzy in the stock pushing the price up to unforeseen heights.

IPhone 5 AD

Much was expected from the new IPhone 5, however markets were disappointed by a phone that was ‘only faster and lighter’ and didn’t offer much else in comparison to previous models. This however did not curb the appetite for sales of the new device as supply is till today struggling to keep up with demand. I expect spectacular sales figures, especially following the Christmas period.

New Management Team

On October 31st the stock fell below the $600 for the first time in over two months in the aftermath of CEO Tim Cook’s management shake-up, with investors remaining sceptical of the current leadership outlook. In an effort to better things, or at least, that is what many perceive it to be, Tim Cook overhauled the management team, in what some believe to be the team to lead the company’s battle in the smartphone and tablet retail business. Apple’s products are predominantly priced at a premium, as compared to peers in the market, albeit near similar specification, or worse still, with lower specs.

iPad Mini

The launch of the iPad Mini saw Steve Jobs turning in his grave as he was always against such a device. Competition from Amazon’s Kindle device however forced officials at Apple to reconsider as they were losing market share in the tablet sector. The device faces tough competition from Amazon Kindle HD and the Nexus 7 sold by Google. Apple Inc. reported 3 million iPads sold during the first three days of launch, which doubled the number of iPad sales when the newest iPad was released in March. The company did not break it down, but estimates are that about 2.3 million of those units are the iPad Mini devices, with about 700,000 of the new iPad 4 models. If the estimate is right, then Apple Inc. blew away expectations of 1-1.5 million Minis sold in the first weekend.

The Wooden Hammer

The company has been caught up in a series of lawsuits and counter lawsuits with a number of rivals with an overall negative effect on the stock. Recent developments include Apple to issue an ‘apology’ to Samsung over a patent infringement claim as well as uncertainty over the outcome of the legal battle with Motorola which the latter is claiming a license fee over essential cellular and Wi-Fi standards. Elsewhere Apple was ordered to pay VirnetX $368.2m over patent infringement as well as $21m to Swiss Rail for using their clock design. Most recently Apple settled a patent litigation with HTC where they are likely to get $6-$8 per smartphone, which would translate to about $180-$280 million as per the estimated 30-35 million Android smartphones sales by HTC in 2013. Admittedly these are insignificant amounts compared to the estimated revenue of about $193 billion in 2013, however when a stock is trading at such high levels any excuse is a good excuse to sell and take profits while they can as investors become wary.

Q4 Earnings Preview

Apple Inc. is expected to report a full year EPS of $44.36, as compared to the initial estimate of $43.81 per share. While full year revenues for 2012 have been revised to $156.3 billion, up from $155 billion. At the current closing price ($542.83) this reflects a healthy earnings yield of around 8%.

iPhone Sales- Apple is expected to report approximately 24.5 million units of iPhone sales, at an average selling price (ASP) of $640 per unit, representing 44% of the company’s revenue, and a similar rate for the YoY growth in sales volumes, for the company’s highest revenue generator. However, the unit is expected to report a decline of 6% QoQ, due to the impact of supply chain constraints.

iPad Sales- Apple is expected to ship at least 15.5 million units for the September quarter, at an ASP of $610, representing 26% of total revenue, and a 39% increase in volumes YoY, but a decline of 9% QoQ. On the other hand, an analyst at BCG is expecting 6 million units of iPod sales, at an ASP of $165 per unit.

The analyst expects Apple Inc. to ship approximately 1.5 million units of Mac Desktops, and 3.6 million laptops in Q4, following the slowdown in the PC industry, as cannibalization from tablets continues to intensify.

Comments from a selected analyst:

“We are concerned about; the erosion in gross margins, the impact of channel inventory, a possible slowing in demand in China, lower priced competition, and expectations running ahead of the market. We also remain concerned on a negative impact of channel inventory on September quarter results”.

My Recommendation

At a current price level of $542.83, I would recommend a HOLD on the Apple Stock at present. Investors who are more optimistic, I wouldn’t have any objection at getting in at this current price level; as the fundamentals of the company remain very strong. Although the fruit of the new apple products is yet to be borne, as well as many exciting products in the pipeline, amongst them entering the TV market; the uncertainty in the US over the Fiscal Cliff as well the post-election syndrome is sure to dampen prices across the board in the short term. For those attempting to market time their entry back into a long position I’d be cautious as corrections of this magnitude in a company with such strong fundamentals should not be taken lightly as before you know it the opportunity will pass you by.

Short Term Price Target: $650

Longer Term Price Target: $800