4/18/13 4:58 – Buy or Sell Apple?

Since the general market is falling, Apple will probably fall with it, faster because it is so out of favor right now. When the market is dropping out of favor stocks get sold harder. Always have. What a complete contrast to the perception of Apple last summer!

The recent news generating the last two days of selling on Apple is actually not from Apple but a supplier to Apple, named Cirrus Logic that gets 70% of its business from Apple.

Cirrus reported that they were experiencing lower sales and looked for that to continue. People naturally assumed that meant Apple is having lower sales that will continue.

I think that is probably the case in iPhones, for which Cirrus provides audio components. Face it – there is no great difference anymore between iPhones and Android phones. And, Apple has stumbled badly in China, a huge market where it actually has a rather small market share, mainly because of price but also due to some bad service problems. High price is also an issue in India and other emerging markets.

To counter this, Apple is widely expected to release a much less expensive iPhone. To the extent that it cannibalizes sales of the higher price iPhone, Apple’s overall profits on iPhones will be hurt. The iPhone provides 50% of Apple’s sales but probably 2/3 of its profits so this is important. But remember, much of the lower price iPad’s sales will be sales Apple would not have had otherwise, just like with the iPad Mini.

iPhones, while a very big product for Apple, are not its whole business and the rest is doing very well, from iPads to iTunes, iTVs, Macs, and iPods.

Mac sales are good, iPods are now a small piece, iTV is bigger than most realize and could get much bigger in the next year or so. There is no significant competitor for iTunes, which is very profitable.

In tablets, I think the iPad is still clearly the best, especially for business use. While competitors are cheaper they also have 7.9″ screens, thus half the total screen size the iPad has. While some like the small size because it fits much easier in a pocket or purse, it is probably too small for most businesspeople, especially those using it for sales presentations or client demos. I don’t know how you type on that smaller size either, though maybe those who thumb-type on their cell phones all day think it’s huge. I don’t know. The Microsoft Surface has been nearly a total bust so far.

New products are rumored but nothing revolutionary. Apple TV, which could be huge, is apparently tied up in negotiations over content with TV and movie moguls. Apparently, Steve Jobs was a much more persuasive negotiator than is Tim Cook, the current CEO.

While it’s sales and profits are slowing dramatically, sales at least are not in reverse and profits are likely to be flat. Apple has eye-popping profit margins and at least double the profitability of many very fine companies. Last year it earned more profit than any company on earth.

Why then is Apple priced at 9X profits vs. a market average of 18X when it is so much more profitable? Even if its profits are lower on future iPhone sales, profits overall are probably not declining.

Apple is already priced at half the value of the average company on the stock exchange. Are you telling me Apple is only half as good a company as the average large US company and that is should sell for significantly less than half the average? That’s ridiculous.

Why the continuing decline then? Because when the selling starts it often gets out of control.

Think of it like a hot love affair that leads to marriage. When the divorce occurs, the feeling is often as hot in the other direction. Adoration can turn to spite. That’s where Apple is today.

I can’t tell you how low Apple will go, just that I think it is priced too low already, and that’s acknowledging its problems. I might wait a few days at least to buy Apple, especially with their earnings announcement due in 5 days. But, I am much more interested in buying Apple than selling it, that is if the client has a long-term outlook and can endure some short-term pain.

What I don’t want to do is sell at less than $400 and be told to buy back higher because the next news was unexpectedly good and people realize they got carried away on the sell side. Extreme love or hate is dangerous, especially on Wall St.