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24 January, 2008

Apple Stock Price and Musings on the Insanity of Wall Street

I invest. I invest for retirement for fun, for family and in companies I believe in. I don't rely on my investments for my day to day income, though that idea has played around my brain from time to time. One of my investments over the past few years has been Apple. Why? I think the company is run very well. I like their ability to deliver innovative products. Management has a way of introducing products at the right pace and the right time. Their stores have that feel that Starbucks did when everyone had to be in one. I believe in Apple's vision and have joined them by investing in the company.

Over the last 2 weeks Apple stock has tanked. Going from around $200 to a low of $125 dollars a share. This caused one of my friends to email with the following questions. And that generated this reply which I thought was good enough for this blog.

The email slice

..what's happening to Apple today? Down 10%? Should I not but an iPhone :)?

My Reply

Wrong! More like 16% right now (11:00 am)

Here is the fuel that sat underneath Apple prior to the earnings announcement:
1) Bush is still president.

2) Tech stocks are not the darlings they were in 2006 - 2007. The tech sell off over the last 2 weeks has finally hit Apple between the eyes of the Leopard.

3) The Finance sector and the mortgage mess has put the markets into hyper-sensitivity. Any bad news will impact a highly held stock more then any good news.

4) Gold and oil dance with new highs on a regular basis. This is slowly forcing more and more investors to switch their holdings into precious metals and energy.

5) Apple found out my retirement was based on their stock doing well.

First the good news:

1) Apple's earnings were up 58% over the same period last year.

2) Revenue was 9.6 billion vs 9.46 billion last year

3) Earnings per share: $1.76 vs $1.61 for last year.

4) Apple sold 2.3 million iPhones in the quarter that ended in December.

5) At MacWorld Jobs said that 4 million iPhones had been sold since product release. Thus Apple is on target to hit 8 million iPhones in one year. What computer company let alone cell phone manufacturer has done that before?

6) Mac sales were 2.3 million in Q4. This is an increase of 44% year over year.

7) Desktop Mac sales grew 5x faster then the rest of the PC industry.

8) Over 1/2 of the Mac sales were to new customers.

9) Store traffic hit a new record of 38.4 million visitors in Q4. That is almost 4x the number of people that visited the store in Q406. I may have accounted for 23K of those visits.

10)Leopard the new OS, generated $170 million in revenue vs $100 million for the 1st quarter release of Tiger.

11) Cash on hand increased by $3 billion to $18.4 billion.

Any company that has that big of an earnings increase should have seen their stock rise not drop.

So what was the ignition source?
1) Apple's projected sales for Q2 is $6.8 Billion. That is up 29% from last year. The street wants more.

2) Apple projected earnings per share of $0.94 vs the street guess of $1.09

3) iPod sales did not meet street expectations: 22 million in Q407 vs the estimate of 25 million. That 22 million was more then
the Q406 sales.

4) Apple has projected sales of Leopard and the iLife suite lower for Q2 which is traditionally a slow quarter.

5) Leopard has been installed on 20% of the machines out there so Apple is not expecting as high a revenue stream from Leopard in Q2.

The Result --
The street saw bad news because Apple didn't fan their butt and so they got mad and dumped the stock. An over reaction if you ask me. If the stock falls to the 200 day moving average, I might pick up some more. Here is why.

1) iPhone sales generate a guaranteed revenue stream for 2 years.

2) International iPhone sales are just stared coming on line in Q4. This revenue stream will continue to grow. Expect it to double by Q308. Yes, the U.K. missed their year end target of 200K units by about 10K but it is winter and people there were busier trying to stay warm.

3) 2nd generation iPhone will arrive Q3 or Q4 and that will generate further buzz.

4) New MacBook Pro and possibly MacBook with a gesture sensitive track pad is bound to be released soon. That will cause a small uptick of sales by those that are sitting on the fence like my friend Kevin.

5) iPhone developer kit is going to be released in Feb. There are already some interesting apps appearing for the iPhone. The developer kit will extend that significantly thus giving another reason for someone thinking about an iPhone another reason to buy one.

6) Movie rentals via Apple TV and the ability to move the rental to whatever device you want to watch it on is the way to go. This will start slowly but build steam as people realize how easy it is to rent and buy video from iTunes. Everyone that I show our Apple TV too is impressed. Impressed enough to buy one? With movie rentals and direct access to iTunes I suspect so.

7) Apple has a new version of their corporate server the XServe - while there won't be many of these sold, it maintains their foot within the data center.

8) Apple has what may be the first commercial use for grid computing - PodCaster. This is aimed at studios, educational institutions and any place that needs to transform a large amount of audio / video content from one format to another. I'm not sure how big this market is, but I don't believe anyone has a similar product out there. The entry costs are high as the system requires OS X Server, XSAN and as many OS X client nodes you can throw at it. Double the server and XSAN for fault tolerance and you have quite a costly package. More importantly, Apple is saying to corporate America "Hey! Want to do grid computing? We can do it without any special add-on software. We include all the software in the price of OS X Server. And by the way, the node software is already on all of you desktop and laptop Macs." That is a pretty strong message.

So there you have it. Bottom line - the market is over reacting. Apple's $200 price may not have been sustainable in the long term but a $126 price is a bit low. In fact that price skirts with the 200 day moving average. At that level, even I have to buy some.

Oh - I forgot something yesterday. Go get an iPhone. It is awesome and it is great for my health. Since purchasing the iPhone I am working out something like 5 times more per week then I was when I had a Razor. Plus, with the latest software update, Google Maps will show me where I am at all times. I just wish it would tell me where my keys were.

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