This is a brief note on Apple since it sold 5 million iPhones at the weekend. I have been saying that the upgrade cycle for Apple would be bullish and it has been as we are seeing record sales. This is due mostly to the fact that Apple’s iPhone 5 launch is a true and dramatic upgrade for the iPhone versus the iPhone 4S launch last year, which was a bit of a disappointment in terms of features upgrade.
The question is what this will mean for earnings and the stock. I still believe that Apple’s halo effect will prevent a large fall in stock price until we see at least one more earnings miss if not two more. The stock is trading at 16 times earnings, which is not huge, rather in line with the market. So if Apple performs decently well, it can easily get the earnings growth necessary to justify its valuation. The most important issues going forward are the product mix, margins and market share.
On product mix, Apple is going to have a lot more upmarket product this quarter due to the launch. So that is good for margins. On the other hand, the iPad mini launch will lower tablet margins, which are already lower than iPhone margins. Overall, that shouldn’t be a worry for the quarter.
On market share, this quarter could see a big rise in Apple market share, which would help to limit any downside from Apple’s not meeting upgraded earnings expectations. For example, despite selling 5 million iPhones, Apple is seeing its shares hit today because the record sales weren’t enough. Nonetheless, the problem could be a marketing tactic as Apple has created an artificial shortage of phones and that will help boost demand later in the quarter. After this quarter is when Apple will have problems. That’s when Android’s relentless upgrade cycle will work against Apple as many different manufacturers release Android product throughout the year while Apple just has one iPhone product launch per year. This will take a toll and could cause a miss in the next quarter already.
Below are a few articles pointing to valuation, sales predictions and review. Note that the Apple Insider review, geared toward Apple users, demonstrates that this phone is a winner from an upgrade standpoint. The only question is adoption rate, which I believe is now working against Apple.
iPhone 5: Apple sells 5m in first three days | Technology | guardian.co.uk
“Apple sold five million iPhone 5s in the first three days after the product’s launch, the company announced Monday. But the figures may not be enough to please analysts’ sky-high expectations and Apple’s shares fell over $10 in early trading.
The sales set a new record for Apple. More than two million people pre-ordered the device, twice the number that pre-ordered its predecessor, the iPhone 4S, and the company sold out of its initial production run.”
Apple on pace to sell 200 million iPhones in 2013
“Morgan Stanley has maintained its “overweight” rating for AAPL stock. Its price target is $720, though the company’s “bull case” scenario calls for a price of $960. Huberty said Monday that if the initial success of the iPhone 5 carriers into 2013, she sees estimates moving toward Morgan Stanley’s “bull case.””
This sounds a bit crazy to me:
“Eric Jackson, the founder of Ironfire Capital, has a $1,650 price target (no joke) on the tech giant.
His predictions are based upon the launch of a not-yet confirmed, but widely rumored, mini iPad in addition to an Apple TV.
“It’s actually, I think, a pretty modest target when you consider there are going to be other surprises down the road — 2013, 2014, 2015 — in terms of new products that probably Steve Jobs blessed long ago,” Jackson said.
During the holiday quarter, Apple could ship 50 million units, Jackson forecasted. He said that this number could double by 2015.”
Review: Apple’s iPhone 5 running iOS 6
“If you’re tempted to hang on to your existing smartphone, consider the benefits of upgrading to iPhone 5 (below in black, shown next to iPhone 4S). Because this year, Apple didn’t just give the iPhone a minor refresh upgrade with a primary cool new feature. It’s a dramatically better phone in nearly every respect.”
Motorola ad slams Apple’s iOS 6 Maps as ‘iLost’
“Google-owned Motorola Mobility is attempting to capitalize on dissatisfaction with Apple’s new iOS 6 Maps with an advertisement pushing the phrase “iLost” on Twitter.”
BBC News – Apple loses German patent court case
“A German court has dismissed Apple’s allegation that Motorola and Samsung infringed some of its multi-touch patents.
The Mannheim court rejected Apple’s claim the two firms had copied how its devices handled data according to how many fingers touched a gadget’s screen.
Apple has 30 days to appeal against the court’s decision.
The Mannheim case is one of several patent trials Apple is involved with in Germany.”
“Factory shutdowns due to worker protest are becoming more common in China. Such an event could pose a serious risk for Apple should these kinds of riots or protests hit a factory producing critical parts for an iPhone 5 or the next iPad.”
Technology
Amazon heads off app fragmentation on Kindle Fire, Android — Mobile Technology News
“From a consumer standpoint, this should improve the Amazon Appstore for Android experience, and not just on Amazon’s Kindle Fire. Any Android device that has the Appstore loaded will benefit, which could in turn lead to more app sales for developers along with additional app revenues for Amazon. That’s important as Amazon has previously sold its Kindle Fire near cost, if not below, in order to get consumers to make Amazon-related purchases.”
Facebook shares drop after Barron’s snub | Reuters
“Facebook shares dropped on Monday after financial weekly Barron’s questioned the social networking company’s value and priced its stock at just $15.”
Seagate Cuts Sales Forecast on Smaller Hard-Drive Market – Bloomberg
It’s hard to tell of this is a product of the market shifting to mobile or weakness in tech overall. As with the Intel warning, it seems that traditional computer tech companies are not ding well. It’s not clear that translates into a slowdown overall. But business spending on technology does not seem to be growing robustly.
Europe
Ireland’s economic growth falls flat | Phillip Inman | Business | guardian.co.uk
“GDP was expected to be in positive territory but failed to meet the target after a 0.4% fall in consumer spending on the previous quarter. Spending is now 10.3% below the pre-recession peak and at a new post-crisis low, as Michael Saunders, chief UK economist at Citi, points out.
In addition, investment fell 29.4% over the same period after a 26.5% rise in the first quarter.
Noonan was jubilant when the Q1 investment figure was released. It will be interesting to see how he explains the subsequent fall.”
ECB in ‘panic’, say former chief economist Juergen Stark – Telegraph
“The European Central Bank is in “panic” over the eurozone crisis and acting outside its mandate with its new bond-buying plans, the bank’s former chief economist said in comments published Saturday.”
Germany Losing Patience With Spain as EU Warns on Crisis – Bloomberg
“Germany’s governing coalition showed growing exasperation with Spain, as a senior ally of Chancellor Angela Merkel said Prime Minister Mariano Rajoy must stop prevaricating and decide whether Spain needs a full rescue.
“He must spell out what the situation is,” Michael Meister, finance spokesman for Merkel’s Christian Democratic Union, said in an interview in Berlin today. The fact he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help he must say so.””
Draghi is devil in Weidmann’s euro drama – FT.com
““Such paper, in the place of actual gold, is practical: we know just what we hold … But wise men will, when they have studied it, place infinite trust in what is infinite.” Mephistopheles, from Faust Part Two, by Johann Wolfgang von Goethe
Whatever you need to know about Germany, you will probably find it somewhere in Goethe’s Faust. But it is rare that wisdom is found in part two of the tragedy, one of the most revered and least read books in all of German literature. Someone who managed to dig up something truly remarkable from it was Jens Weidmann. The president of the Bundesbank cited Mephisto’s advice to the Emperor, quoted above, that the simple solution to a lack of money is to print it.”
United States
Brooklyn Booms as Record Rents Drive Construction – Bloomberg
““One of the key drivers of the rental market, whether Brooklyn or nationally, has been tight credit,” said Jonathan Miller, president of appraiser Miller Samuel Inc. in New York. “Residential mortgage lending is one of the only forms of credit that has not seen measurable easing since the financial crisis began.”
Real estate investment trusts that own apartments, including the largest, Chicago-based Equity Residential, have returned more than 260 percent since March 2009. The Bloomberg Apartment REIT index gained 6.2 percent this year, including reinvested dividends, as investors speculate the pace of rental growth will slow as more Americans benefit from record low mortgage costs to purchase homes.”
‘Gentle giant’ Paul Volcker has too little time left to fix the world – Telegraph
“Paul Volcker sees the current era of economic and political turmoil as one of the most difficult periods in history.”
Paul Volcker: ring-fencing banks is not enough – Telegraph
“Ring fencing Britain’s banks will not protect taxpayers in the event of another financial crisis, according to Paul Volcker, the former chairman of the Federal Reserve and the architect of the “Volcker Rule”.”
Pension Crisis Looms Despite Cuts – WSJ.com
“Almost every state in the U.S. has made cuts to its public-employee pensions, seeking to dig out from the economic downturn, but so far the measures have fallen well short of bridging a nearly $1 trillion funding gap.
Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions.
The state measures show how economic forces are reshaping traditional rivalries, convincing lawmakers and labor leaders that past public pension plans are unsustainable. In Ohio and elsewhere, politically potent unions have locked arms with state officials over the pension cuts.
But the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, according to estimates prepared for The Wall Street Journal by researchers at Boston College.”
Pimco’s Gross’ bet on munis paying off – The Tell – MarketWatch
“The manager of one of the world’s biggest bond funds has done fairly well investing in municipal bonds. And he’s not alone.
The asset class has returned 6.08% so far this year, according to an index compiled by Bank of America Merrill Lynch. That’s much more than U.S. Treasury bonds, which have returned 1.7%.”
Elsewhere
Analysis: Argentine banks get squeezed by state lending campaign | Reuters
“Argentine banks are reluctantly complying with state orders to make cheaper, longer-term loans to small businesses, but they worry about shrinking profits and more aggressive government meddling down the road.”