AAPL upgrade cycle coming?

On the eve of Samsung's launch of iPhone 5's competing offering in NYC, AAPL is upgraded by one of its early bears, BTIG. Interesting to note that he thinks AAPL may miss its own guidance this current quarter and the next. Also this:



$174 billion revenue expected for 2013. Yet the stock is trading at multiples last seen in 2009, when the company was doing only $42 billion in revenue. For a nice summary and skeptical view, see this article.

Most important thing to remember is that most of the huge installed customer base of Apple products are happy with their experience. This interview with Apple's marketing chief is interesting.

Could this be the start of an upgrading cycle among the analysts?

(3/15/2013. One day later, after the Samsung Galaxy S4 launch, Morgan Stanley came out with a note predicting numbers bottoming.)

The "shock therapy" Sachs?

Remember the "shock therapy" advocate Jefferey Sachs, who in early 1990s prescribed rapid and systemic change to the former soviet block countries?

You would think he might advocate bold economic actions as a way to counter the severe recession of 2008?

To the contrary, he is all for the long-term, careful, structural, deficit-paranoid, piecemeal approach.

Surprising.

iWatch: inevitable innovation

A client asked about Apple stock. It is concerning as it keeps on dropping.

Many big funds are bailing out. Why? They got hurt, and they don't like their positions. They don't really have special insights as to how Apple as a business will do in the next 5-10 years. They herd on the way up and on the way down, along with wall street analysts.

Apple's cash hoard is huge. But how to return the cash to investors isn't a big issue. Apple may need it for product development, supply chain investment, or acquisitions. Increasing dividends from 2% to 4% or 6% does nothing to creating enterprise value.

Key will be product innovations. Sometimes the leader can be out-done by imitators or by new technologies. I have enough faith in the company to think that they'll stand still or lose their touch.

I don't want to speculate what's coming next, but something that would extend its iOS ecosystem will come to the market sooner or later.

iWatch appears to be very believable. Let me link to a nice article that says that iWatch fits Jonathan Ivy's definition of "inevitable innovation." From here, you start to see a closer link to the iPayment service that one day will deal away with cash and cards.

And, how about iCar?  Evidence:



However, news like these do very little for AAPL stock these days. Bad news get reflected, good news don't. This has to be the best time to buy AAPL shares and wait.

I have to agree with Barry Ritholtz on his take that Wall Street probably never understood Apple, although his use of the term "law of large number" is ridiculous. 

When and where can one buy primary growth options for free?

I used to teach an intro corporate finance course, and one of the important concepts for valuing a company is that its current value equals to the value of its assets-in-place plus the value of growth options.

The value of assets-in-place can be estimated from balance sheets and the streams of cash flows that these assets are expected to generate over the foreseeable years.

The value of growth options can be extremely high for technology companies that can break into new areas of growth. That's what gives tech companies very high earnings multiples. You normally cannot buy these growth options for free. That would be considered a financial free lunch.

Yet, if you look at AAPL today, you can't help but wondering why investors are offering you to take away the growth options for better than free.

Apple, the primary driver of mobile revolution and the maker of a series of iconic products iPod, iPhone & iPad, is now valued at an earnings multiple below 10! (Its share price came below $420 yesterday.) You can argue whether or not analysts' earning estimates are off, or if iPhone's profit margin is coming down due to the fierce competition from Google and Samsung, but you cannot be serious if you think Apple is just going to stand still, with or without Steve Jobs!

The company is doing over $120 billions a year in revenue, and making $40-50 billions in profit. More importantly, consumers love their products. I can't take my iPad away from my 4 and 8 years old kids! And they're having access to iMac and iPad in their schools on the daily basis. I have an Android phone, and my wife has an iPhone. I can tell you that I'd like to switch to iPhone next time.

The big picture is this and it's the most important for Apple investors: the world is converging to digital. We're going to be connected, more than ever, via these elegant devices wherever and whenever. These devices are not only indispensable,  they must also be friendly and a pleasure to use.

Apple is at the very center of this mega-trend. Best positioned, and has the most cash and best brain to push the mobile envelope.

If you like free options, buy AAPL.    

You think the Fed governors should know better

Three interesting headlines on CNBC today: Two inflation hawks expressing opinions and worries about inflation and inflation expectations, while a CPI report showing decreasing inflation (disinflation).

Do you think these governors know better than, say, an average college graduate? You can hardly discern any special insight from them, rather than their usual positions of worrying about potential inflation. How did they get from here (depressed economy) to there (heightened inflation risk)?
 

Recent trends

Today's US ISM non-manufacturing index for November came in at 54.7%, slightly better than expected and indicates a continuing and steady expansion of the main US economy since the 2008 crisis. Employment sub index went down to 50.3%, a 4.6 points decrease from last month, possibly reflecting the Sandy effect and  the holdup due to the "fiscal cliff" (or "deficit reduction cliff") worry.

Compare this to the US ISM manufacturing index released a few days ago, there is an important contrast. Manufacturing had been leading the US out of recession until recently. Last month the manufacturing index dipped below 50 (contraction) at 49.5%, the lowest in 3 years. It is hammered by the weakness in Euro zone and Asia.

US domestic recovery, powered by consumer spending, however, has an underlying strength. Auto sales, retail sales, housing constructions have been relatively strong in recent months. Consumer credit has expanded, especially in auto loans. Home prices have started to increase YoY, which is expected to continue given the demographic trend and the Fed's easing stand.

While consumers are spending and relatively optimistic, businesses have become very cautious by piling up cash and holding off hiring. Resolution of the "fiscal cliff" issue could probably help bring these divergence back into a better balance.

Overseas, it is possible that China's new leadership could deepen economic reforms and provide a moderate stimulus to help shore up its growth. Continue to grow above 7% is crucial for China.

Even Europe could see more stability going into 2013. Both Italian and Spanish yields have come down substantially in recent months. ECB has been a tremendous force in stabilizing the financial sectors. The real economy however will continue to drag.

Given these major trends, there is a real opportunity for the equity market in 2013. Buy in dips.

Republican tantrum next two years? It has already started

Paul Krugman is predicting that we're going to see a lot of temper tantrums from the Republicans over the next two years.

Well, it has already started with the clowns at CNBC: Santelli's Rage.



Every time I hear discussions between the perfectly reasonable Steve Leisman and this shouting madman Rick Santelli who seems to always have the backing of another clown Joe Kernan, I feel really sorry for Mr.Leisman. Why does he have to work there!