Apple Sauce & Speed Bumps (AAPL)

Photo: Lynn Ostrem

Jeff Gundlach shared that he believed that Apple would see $425 before it revisited $600 during his Year of the Snake Q&A earlier this month.  He reinforced that yesterday on CNBC: http://www.benzinga.com/media/cnbc/13/01/3268485/jeff-gundlach-apple-is-broken-over-owned-stock

A year ago, we urged investment conference audiences to always remember that “Speed Bumps Happen.”  We also joined with Joshua “Reformed Broker” Brown to compare the price target gold rush for Apple to what we saw from the late 1990s and companies like Qualcomm.

Is 2012 Apple The New 1999 Qualcomm? (From April 3, 2012)

This week, we take a look at 1999 Qualcomm vs. 2012 Apple. My investment club was an active participant in QCOM 1999, something that Ken Janke called “the WILDEST RIDE he’d ever experienced in nearly 50 years of long-term investing.” What can we learn from history?

  • During a recent webcast, Barry Ritholtz of The Big Picture raised the question as to whether business and stock price conditions at Apple could be similar to Qualcomm a little over a decade ago. (www.ritholtz.com/blog is a TROVE of investment information.)
  • At the recent Mid-Michigan regional investing conference, we reviewed portfolios that were dripping Apple juice. It’s a good problem to have. Should we sell?
  • I urged attendees, particularly Apple loyalists to carefully ponder a couple of realities: (1) Apple has historically been VERY successful at protecting market share. Rabid advocates take customer loyalty to a whole new level.
  • (2) Apple has historically been weak at capturing incremental market share beyond the rabid faithful.
  • (3) Treat any analysis of Apple in much the same way that we regard Pfizer/Pharmacia/etc. and other bolt-on acquisitions. Even though the Apple new markets/divisions come from within, they behave with the characteristics of bolt-on acquisitions ultimately … a form of hybrid M&A. Be careful with those 60-80% quarterly year-over-year results.

There are certainly similarities when it comes to price behavior. Note that the relative strength index (RSI) trends are quite similar, indeed. So from a technical analysis perspective, it naturally begs the question about speed bump vulnerability.

But the price history provides a little different perspective. Although the incredible stock price surge in Apple (AAPL) is formidable, it actually pales versus the advance in Qualcomm during calendar 1999.

We also note that the Value Line low total return forecast for Qualcomm back then went seriously negative — a sign that the rhinos were pretty confused about business prospects (growth and profitability) in the wake of shedding handset manufacturing to focus on the achievable royalties from an emphasis on innovation.

The side-by-side business model analysis displays some similarities.

The biggest question revolves around achievable profit margins for Apple going forward depending on the product mix. For 1999 Qualcomm, the convergence of the bottom line (EPS) with the top line (Sales) suggested a significant shift in net margin (%) and was at the heart of the confusion at the time.

One of my most powerful memories of Y2K are the rapidly evolving forecasts as it seemed every analyst on Wall Street engaged in a game of one-up the other guy. The rhinos elbowed their way to higher fundamental expectations in a wake of “P/E ratios no longer matter any more.” “You’re such a dinosaur.” “Earnings? We don’t need no stinking earnings!”

We note the step changes in the fair value estimate from Morningstar here … and note that S&P has ratcheted from a fair value estimate of $426.70 (fairly recently) to a new plateau of $752.80!

Apple isn’t finished, yet. Whether reinventing the music business, making phones smarter, offices more portable, making meaningful Mandarin in-roads or redefining television. By the way, I find that I watch more TV on my laptop than in the living room these days — that’s clearly intriguing. At least as compelling as the day ten years ago when I realized I listened to, and bought, more music via my computer despite some crummy speakers. Remember Napster: The Original? Steve Jobs noticed and capitalized.

For all we know, Apple is working on a transporter beam … and the project is in “alpha.” 🙂

As shown here, the transformation of 1999 Qualcomm was at the heart of the mystery. Few of us saw the margin enhancement, maturation and persistence for Qualcomm at the time. In the case of present day Apple, having a vision for what is possible when it comes to profitability is at the core. (Sorry … couldn’t resist, pun intended.)

Is 2012 AAPL The New 1999 QCOM?

No. Yes. From a price momentum perspective, somewhat.

The business model transformation at 1999 QCOM was massive. The 2012 AAPL version is a little more subdued but nonetheless temporarily confusing to the rhinos. The talking head appearances are definitely approaching full deja vu status with $1000 and $1001 price targets for Apple as recently as yesterday.

Should we sell? Could Apple be a roman candle? We’d recommend consideration of trailing stops – particularly for any positions (or portions) that exceed concentration guidelines.

As the haircuts in the accompanying figure provide a reminder, speed bumps are inevitable.

Aapl 20-year chart 20120321

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