Between the dire headlines and the near-6% plunge on the Apple chart on Wednesday, it wouldn’t be tough to conclude that Apple Inc. (AAPL) is toast … a once-great company that simply ran out of willing buyers for its product.
Indeed, for a perpetually optimistic Apple CEO to utter the words “We’re seeing extreme conditions unlike anything we have experienced before just about everywhere we look” during the quarterly results conference call … well, some investors are taking it as a cue to proverbially head for the hills.
A funny thing happened on the way to inevitable doom for AAPL shares and the company on Wednesday, though — the stock didn’t actually implode even though the bears could have done some real damage. Could it be the worst-case scenario was already priced in?
Apple Earnings
On the off chance you’re reading this and haven’t heard, Apple’s earnings last quarter were just so-so, and its guidance (to the extent Apple gives it) wasn’t exactly thrilling either.
In numerical terms, for the quarter ending in December, Apple earned $3.28 per share on revenue of $75.9 billion. The bottom line beat the expected profit of $3.23 per share of AAPL, but analysts were calling for a top line of $76.61 billion. Total sales were up just a tad under 2% on a year-over-year basis, from the year-ago revenue figure of $74.6 billion, and net income was up comparably.
It’s worth noting, however, that on a constant currency basis, sales grew about 8%.
The dollar amounts are in many ways secondary measures of success or failure, though. Investors are just as interested if not more interested in unit sales for each of its popular devices, and that’s where Apple disappointed. Last quarter, Apple sold 74.8 million iPhones … a record, but still short of the anticipated 75.5 million. The pros were looking for iPad sales of 17.9 million, versus the 16.1 million units the company actually sold.
The bright spot: iTunes software and services. CEO Tim Cook aims to cultivate that bright spot going forward, though it’s still not yet Apple’s bread and butter.
With that as the backdrop, investors’ pessimism today makes sense. On the other hand, is the market really all that pessimistic on AAPL? The shape of Apple chart — looking beyond Wednesday’s action — says maybe not.
Apple Chart Finds a Floor
Click to Enlarge Wednesday’s drop from AAPL is admittedly ugly (though stocks have survived worse). Yet, Wednesday’s drop has yet to pull Apple shares below that floor around $93.40 that came into play as of the middle of last week. Wednesday’s low? $93.34. It’s close to the tipping point, but not quite there yet.
Coincidence? Maybe, but not likely. As disappointing as the Apple earnings report for last quarter was — and bear in mind what’s bad by Apple standards would be wonderful for most other companies — the chart suggests this disappointing earnings reports was already factored in. AAPL shares were down 28% from their June high as of the middle of last week before the pre-earnings rally effort unfurled.
But a chart’s history reflects a company’s history, and a chart’s future is based on the company’s future … which the market can only guess at? Nope. That’s a naive view of how the market works. Investors collectively price stocks anywhere from six months to two years in advance of future results. And, as much as Apple is watched, it’s unlikely the company is capable of reporting anything truly surprising.
In other words, the market is plenty efficient … particularly with AAPL. If the bears couldn’t convincingly crack the line in the sand established at $93.40 with disappointing news in hand, odds are good it had already been fully factored into the stock’s price.
Indeed, if anything, Wednesday’s action confirms the strength of that support area.
The Survey Says …
As of Wednesday’s pullback, the forward-looking P/E for Apple is a mere 9. That valuation doesn’t yet factor in Tim Cook’s suggestion that the current quarter could be lackluster, but even though it doesn’t, Apple is still dirt-cheap given the caliber of the company and the creative problem-solving skills its management team brings to the table.
It’ll be fine, in the long run. In fact, it may already be at its ultimate cyclical bottom.
It’s sounds a little counter-intuitive at first, but AAPL may be buy-worthy now if for no other reason than individual investors — as measured by social media — mostly don’t like it.
Click to Enlarge Taking the contrarian stance that the “average Joe” investor off the street is most wrong when he’s most sure he’s right, the recent tipping of the scales to a bearish view of Apple in many ways implies the stock’s weakness has finally run its course.
Click to Enlarge In complete contrast, the so-called “smart money” made up of institutional investors and analysts hasn’t been more bullish on Apple in years … and the group is still raising expectations, with the number of buy and strong buy recommendations still going up and the number of sell recommendations going down (even as target prices are being reeled in a bit).
Bottom Line
The disparity between the professionals’ opinions and the amateurs’ opinions hasn’t been this wide in over a year, suggesting a sea change is in the making. That change is pointed in a bullish direction … and that idea is underscored by the recent Apple chart and Wednesday’s failure to actually move to a lower low.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
