Apple with a record, but that is not good enough

Sometimes when you are expecting Wagyu Kobe beef steak (the finest I am told, 258 Dollars per kg – 2321 ZAR per kg, it better be!) and instead you are slapped with a filet mignon. Apologies to my vegetarian, Hindi, Muslim and Jewish friends, you can send me another comparison. What I am talking about are the Apple results. You were expecting world class and all you got was enough to make the national team. Not all bad, because as the headline says: Apple Reports Record Results.


That is true, they sold more iPads and more iPhones than at any other time in their history. Bearing in mind that 6 years ago zero iPhones had been sold and three years ago zero iPads had been sold. In the last quarter, as the company points out, there were "47.8 Million iPhones Sold; 22.9 Million iPads Sold". But that was a disappointment for the general market, as Gene Munster from Piper Jaffray said, if the number had a 5 in front of it, the market might have reacted differently. The first quarterly sales expectations for the iPhone were closer to 58 million, so working backwards from that initial number, you can appreciate the disappointment from the market. And, as ever, it depends what your reference points are. If you bought Apple at 700 bucks you are feeling wretched, at 7, well, not so much, the company is paying 2.65 Dollars a quarter, you should get your money back in three quarters. Most people however having been recently in the stock, it is one of the widest owned stocks by hedge funds, so I am guessing that they are all "wrong" in the short term. What drove the share price higher was momentum around sales, beating guidance and of course beating the whisper number comfortably. This is the first quarter in a number of years that you are seeing the momentum slowing somewhat. And that is in large part the reason why in the aftermarket the stock is trading down nearly 10 percent.


So, should you freak out like Cramer? Should you shout and jump up and down that "they" know nothing? Is 460 odd Dollars a good price for Apple, the company? Do you want to be owning this company for the next half a decade? Well, on an ex cash basis the stock trades at an astonishingly cheap 7.1 times earnings. That cash pile, which includes both short term and long term securities tops 137 billion Dollars. As a few people pointed out, that is more than the entire GDP of Vietnam. Last year of course. That is a 12.9 percent increase on the quarter. Wow. At the implied opening price of 463.49 Dollars, 31.2 percent of that, or 144.74 Dollars of the Apple share price is cash, and cash alone. The yield on that is low, really low, in an interest rate environment that is set to continue for the next year and into the year after that.

Rolfe Winkler has a great story, Paul steered us in this direction: Apple Draws the Short Quarter. The conclusion is interesting: "Clearly, Apple didn't provide the kind of blowout quarter many have grown accustomed to. But the results aren't the total disaster implied by the market meltdown."


As Byron also pointed out, though, the guidance was mushy, because the management decided to go the route of "realistic" rather than "conservative". And sadly the realism for the coming quarter was lower than the market wanted to see. Again, I have not answered the question, should you freak out? No. If all those people who activated products running iOS in the last two years, replace their devices in 2014, the number tops 200 million. If the Apple faithful just renew their devices, they can generate over 50 billion Dollars in cash flows. This is without adding new customers. And this presumes that they keep their existing customers. We continue to see share price weakness as an opportunity to accumulate more stock. This company six years ago used to sell only iPods and Mac's, if you needed a reminder.