Bobbing for Another Apple
A few days ago I wrote an article about Apple bottoming. You can read Stealing Apples While Others Panic to better understand the bottoming process. The quick answer is that investors lose their desire to accept the current price and dig their heels in.
Another common name for investors' unwillingness to sell is "strong hands," and that's where Apple is right now. The bulk of investors are not willing to sell because they don't have a better place to put their money.
The most common question I'm receiving now concerns Apple's upcoming earnings release. I understand the enthusiasm (some may call it worry), but I caution long-term investors not to get too caught up over one quarter. It's not healthy from a mental or financial point of view.
Shrinking margins have become the Wicked Witch of the West, and lower purchase orders by Apple appear to be a Wicked Witch of the East. (Was there a Wicked Witch of the East? I don't know, but you get the point). Both of these issues may help sell newspapers and help some in the media look smart, but you will overvalue both of the metrics at your own financial peril. Here's why.
Apple's margins are massive by any standard. After adjusting for the largest reasonable cuts to gross and net margins, Apple still maintains a lead in margins that competitors Nokia (NOK) , Research In Motion (RIMM) , Microsoft (MSFT) , and Sirius XM Radio (SIRI) would love to enjoy.
My estimated forward looking operating margins:
Apple: Minimum of 30%-33%, but I believe 33-36% is more likely.
Nokia: 1%-2% estimated best case, although they may not have any.
RIM: 3%-6% estimated best case, but 0%-3% is more likely.
Net margins largely follow the same pattern on a relative basis. Dollar for dollar invested, investors can expect a greater return on investment with Apple than most any other technology company. The price-to-earnings ratio is pricing in zero growth. No one is reasonably suggesting that Apple will not at least have the second best quarter ever if they don't report the best in both revenue and earnings.
Only the very bottom estimates for 2014 (the next fiscal year) suggest 2014 will not turn into a record year for revenue. Yet, as clear as crystal, emotion has taken hold of the weaker hands, and the stock is trading with single-digit P/Es. Intel didn't delight Wall Street with its last earnings report and continues to trade at a higher valuation.