Christmas and Chanukah came early this year. The Street completely misread Apple’s (NASDAQ:AAPL) most recent earnings announcement, the stock took a bit of a hit, and now we have the buying opportunity of the year … maybe even the decade.
What Apple announced, everyone focused on the word “missed.” They missed revenue estimates. They missed profit estimates. But the message from the company that some people missed was, “The whole world was waiting for the new phone. They did not buy as many of the old phones. But now, we are sold out of the new phone and, by the way, we have a free phone for low-end users.”
In other words, everyone’s used to (only) hearing how much Apple “beat” expectations. And true to form, they did plenty of that — the company beat on iPad sales, Mac sales and margin expectations. The physics majors and engineers turned analysts who need to justify their spreadsheets looked at the numbers and sold or said not to buy. And to that, I say, “Thank you for that early holiday gift!”
So, is it time to sell or time to buy instead? The iPhone worrywarts need to consider this: A recent survey by ChangeWave Research/451 Group showed enormous pent-up demand for the 4S, and the newest smartphone’s sales were more than double that of the iPhone 4 during its own launch period.
Plus, the company just opened up pre-orders for the phone in 22 additional countries. There’s no doubt that this stock will recover lost ground, and quickly.
Of course, that is a response to a short-term worry. What about the longer term?
Apple is the world’s dominant brand in consumer electronics. So, it has tremendous market share and, therefore, the stock has no room to run, right? Wrong. Here’s why:
- The world market for cell phones of all kinds in 2012 is estimated to be 1.7 billion units. Apple’s share estimate? 110 million units, a 6.5% share.
- The world market for tablets in 2012 is estimated to be 72 million (JPMorgan (NYSE:JPM) estimates), with Apple selling 45 million to 50 million — a 62% to 69% share. Well, actually, I look at this market as tablets plus their “displacement equivalents” — netbooks and very low-end laptops increasingly displaced by tablets — and I find that market to be roughly 200 million units. So, Apple has only a 25% share.
- The world market for computers in 2012 is estimated to be about 440 million units (Gartner Group). Apple sold 4 million Macs in Q3; let’s say they sell 25 million in 2012 — that is a 5.7% share.
Apple is the world’s best consumer brand. Its electronic products have the highest level of consumer satisfaction. It’s the largest market cap company in the United States. And it has 6.5%, 25% and 5.7% share in its target markets, not to mention margins that are almost double that of their primary competitors.
In other words, if you’re still wondering whether it’s a buy right now, there’s the bullish case in a nutshell.
If you don’t own AAPL already, I recommend that you buy it. (Disclosure: I own it.)
Another way to trade it is to buy call options. The January 2012 and the January 2013 calls look good right here. If you buy the out-of-the-money calls — that is, with strike prices above the market price — you get more leverage as it moves up.
I also write calls (“Sell to Open”) against my long stock all the time. Before the earnings announcement I sold calls, and bought them back when the stock moved down. Doing this month after month (and week after week with AAPL’s weekly options) helped me to average down the net cost of my shares roughly $6 a share.
The great thing about selling calls against your long stock (i.e., the covered-call strategy) is the income you can bring in on a regular schedule. The covered call isn’t a “one and done” strategy – you can keep doing it again and again. That money not only helps bring down your cost average for the shares, but it also ensures that your bottom line keeps growing with every trade.
From time to time, however, I’ll take some of that cash income out of the markets — I believe it’s important to enjoy your returns along the way. Next time I take out some cash, it will probably be to buy a new iPad for my wife for Christmas. Unless they are sold out, of course!