Apple Up 18% In Five Weeks, Announces Smart Connected Home Platform

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Apple Up 18% In Five Weeks, Announces Smart Connected Home Platform
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Apple Inc. (NASDAQ:AAPL) stock jumped 18 percent since announcing a 7-for-1 stock split with earnings last week, coming off the firm’s earnings announcement, far outpacing gains in the S&P 500 over a similar period of time.

This could lead to another bull run in the stock, something Apple Inc. (NASDAQ:AAPL) investors have grown to expect as the stock has been a market leader. “I think there’s still another leg up here, once these new product categories come out. It was over penalized on the way down. The simple answer is I don’t think it’s overvalued,” said Gene Munster in a CNBC interview, who follows Apple at Piper Jaffray.

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George Jetson smart home

The company today announced a “George Jetson smart home” today that will elongate the company’s reach to everything from smart ovens, dishwashers, TVs, security systems, home temperature and more – all controlled by the user’s iPhone.

The Financial Times is reporting that Apple Inc. (NASDAQ:AAPL) is developing an operating platform that operates appliances in a “connected home.”

Home automation systems typically have required significant structural work, an issue that Apple could provide significant automation.

Samsung, Google and Apple compete for control of the networked house

A significant shift in Apple Inc. (NASDAQ:AAPL) could come in how it packages and sells the new service. Speculation is Apple might install its operating system in other devices and sell its product through third party manufacturers for the first time. A primary point of differentiation between Apple and Microsoft Corporation (NASDAQ:MSFT) was the fact Apple manufactured and sold its product. Microsoft, on the other hand, sold its software into products manufactured by third party partners.

Apple Inc. (NASDAQ:AAPL)’s home automation business competes with Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL)’s nest, which the company purchased for $3.2 billion this year. Nest makes thermostats and security systems but speculation is the offering could expand significantly. Strategy could be for a company to fight for control over the entire house and then influence the products that enter that house. Once a house selected an Apple operating system, for instance, that could be the dominate system in all appliances in the home.

In addition to Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is a rival in the market as well, developing a range of smart appliances, TVs and washing machines, all operated through smartphones and watches.

Carl Icahn gave his blessing regarding the developments, saying “Believe we’ll also be happy when we see new products,” he tweeted.

New products are great, but its the phone that matters in the near term

While talk about the future of the connected home makes for good copy, the real difference in the near term could be the latest development in the iPhone, which is offering a larger screen experience.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)www.valuewalk.com
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6 COMMENTS

  1. Thanks. I’ll agree to disagree, but I do appreciate your response.
    To be clear, I’m not bearish on AAPL, per se. I believe it would take a fool to short this stock. I just believe there are better options out there at this point. Watching the market closely over the last year, the “piling on” effect has become particularly pronounced. Take a look at NFLX, FB, etc. You see massive run ups in stock price over relatively short amounts of time, with little to no fundamental improvement. I would call it the year of the lemmings. Then, we subsequently see massive sell-offs. IMHO, that is what is happening here. Any bear who stood in front of NFLX on the way up got crushed. But, bulls who bought at the top are still crying and as we have seen there is no reliable way to call the top or determine when sentiment will change.
    I keep pointing to the $100 billion because I just don’t see the fundamentals to support it. Which means this increase is likely, once again, lemming driven.
    But, I appreciate your points and will just sit back and see how it plays out at this point in time.

  2. “What changed? You should read or listen to the Apple 2Q report.

    To analysts, investment bankers, experienced investors, and those of us who have had at least one finance course, reading the transcript of Apple’s 2Q report was entirely self-explanatory. If anyone has read the transcript or heard the report and not understood, my brief comments may not be sufficient to remedy that situation.

    However, a word to the wise is sufficient, so I will include here a few brief comments on your questions in hopes that I can be of some assistance.

    1. “Start at the top” The top would be the 2Q report:
    a. Revenue $45.6B beat analyst’s average estimates of $43.5B and also beat Apple’s own guidance of $42-44B. This compared with $43.6B for 2Q last year.
    b. Profit of $10.2B or $11.62 per share compared with $9.5B or $10.09 per share for 2Q last year.

    2. What good is a stock buyback?
    When shares outstanding are reduced, EPS rises, increasing the value of each remaining share.

    3. Why pay dividends?
    Dividends distribute a portion of the profits to the owners of the company.

    “We generated $13.5 billion in cash flow from operations and returned almost $21 billion in cash to shareholders through dividends and share repurchases during the March quarter,” said Peter Oppenheimer, Apple’s CFO. “That brings cumulative payments under our capital return program to $66 billion”

    4. Why were iPhone sales results underestimated?
    a. Apple does not provide interim results and secondary sources are unreliable.
    b. China sales were and continue to be severly underestimated.
    c. Bear analysts have spread fear, uncertainty and doubt for 18 months.

    5. How did iPhone sales compare with estimates and with last year? iPhone sales of 43.7M compared with 37.4M in 2Q last year. Analysts had estimated an average of only 38M for 2Q this year.

    6. 58.5% market share in Japan. Was this “new” or “forgotten”?
    a. Before actual company reports, rumors circulate but are not fully believed.
    b. DCM, Japan’s largest carrier has only been selling for 2 quarters.
    c. The “aspirational” value of iPhone in Asia is only beginning to be understood.

    7. China Mobile 4G rolling out. “How did we all miss this massive untapped market?” I agree! This market is enormous and there is really no good reason for the nearly universal skepticism that has continually downplayed the China phenomenon. Nevertheless, here are some facts which might help explain it:

    a. China has over 1.5B citizens and Tim Cook has predicted that China sales will soon overtake USA sales for Apple.
    b. China Mobile (CHL) is China’s largest carrier with over 775B customers which is more than China Telecon and China Unicom combined. (and over twice the population of the USA)
    c. After years of negotiations, CHL and Apple finally cut a deal last fall.
    d. CHL only began selling iPhones in January.
    e. China has an antiquated mobile phone infrastructure with little 3G and almost no 4G service so the untapped market is huge.
    f. CHL began a $7B rollout of 4G services in February with the goal of selling 100M phones to new 4G customers in 2014.
    g. By the end of April, CHL sold 4.8M phones to new 4G customers “most of them iPhones”.
    h. Because 4G is the best, the fastest, and the most expensive service available in China, new 4G users are typically affluent and aspirational, which fits the Apple demographic perfectly.
    i. This took many by surprise, because the story had been circulated that China’s low median income and wide availability of cheap smartphones would preclude success for Apple in China.
    j. Apple iPhone is the aspirational icon in China, but once again, many have simply not understood this effect.

    As a side note, Audi and Mercedes Benz both reported their best quarters ever, attributed to sales in China.

    Finally, you have made much of the $100B amount of value that was somehow “gained”. Apple has been and is still severely undervalued as has been pointed out in many articles over the last year. I would say the $100B was not “gained” but “regained”.

  3. Let’s look at this logically, I’ll start at the top.

    $90B stock buyback

    – adds nothing to the fair value of the company. Essentially another accounting style gimmick that should not increase market capitalization by $100 billion. If anything, indicates that the company cannot use its own capital to grow and is better served in giving it back.

    8% dividend increase

    – adds nothing to the fair value of the company. Essentially another accounting style gimmick that should not increase market capitalization by $100 billion. Also indicates that the company cannot use its own capital to grow and is better served in giving it back to investors.

    43.7 million iPhones

    – how did this compare to expectations and future maintainable earnings? Was this some massive earnings stream that analysts and investors somehow missed. Were they surprised to the tune of $100 billion in future cash flow (actually much greater when you consider the time value of money). If so, they may want to consider changing careers.

    58.5% market share in Japan

    -same comment as above. Is this new? Did no one see it coming? So, you are telling me that $100 billion worth of value was just “forgotten” about until 5 weeks ago? hmmm..

    China Mobile 4G rolling out

    -same comment. How did we all miss this massive untapped market?

  4. “The company today announced a “George Jetson smart home” today that will elongate the company’s reach…” Wait, who announced what? Nobody announced anything, somebody reported a rumor, nobody announced anything.

  5. hahaha, so 18% is roughly $100 billion in market capitalization, yes billion. Tell me what the company has done in the last five weeks to add $100 billion worth of value. What has fundamentally changed? They announced a stock split, which is basically an accounting gimmick that adds nothing in real value. There really is a sucker born every minute.

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