High-quality reporting on today’s events concerning Apple: Key talking points at Mac Rumors; detailed summary at POLITICO; three-minute excerpt at Bloomberg; full-length hearing in two parts at Bloomberg; and Senator Rand Paul defending Apple’s tax policies and criticizing Congress on YouTube.
Bill Gates, in his most recent interview with CBS’ Charlie Rose, recalls his relationship and last conversation with Steve Jobs.
Jesse Felder:
To further demonstrate Apple’s amazing profit machine consider that aside from the company’s cash pile it has about $32.5 billion at work on its balance sheet that is responsible for generating that $47.4 billion in free cash flow. That’s greater than a 145% return on invested capital. A company generating a 45% return is considered a super star in the corporate world. 145% is absolutely astronomical. Put the cash back in to the equation and the company generates a still meaty 28% return on total assets.
It’s only Tuesday, yet conflicting reports regarding Apple and iPhone 5 demand are flooding the web. The Wall Street Journal published a report Sunday evening, along with Japanese media outlet Nikkei, that Apple had cut iPhone 5 display orders in half while also decreasing other component orders, all in anticipation of a slower second quarter. The WSJ article specifically cites that Apple had originally planned to order 65 million units for iPhone 5 displays.
However, there are a few strange things about the alleged 65 million.
Both the WSJ and Nikkei articles fail to mention that Apple’s iPhone 5 and iPod Touch use the same 4-inch Retina display. Looking at estimates for total iPhone sales during the first quarter, the average is about 50 million units. Let us assume that the number of iPhone 5 units sold is around two-thirds of that, as it typically is. This would be 35 million units. In other quarters, such as the seasonally low second quarter, iPhone 5 units sold will likely be 25 million units (based on Apple’s previous second quarters of their flagship iPhone). Apple typically sells 4 million iPod Touch units in the first quarter and sales of the iPod Touch generally fall around 50% into the second quarter. With that in mind, we can add 2 million units to the total number of units sporting a 4-inch Retina display that Apple will likely sell in the second quarter.
Taking that into account, the number of 4-inch Retina display units Apple is to likely sell in the second quarter is around 37 million units. Why did the WSJ, as well as Nikkei specifically publish their articles with the mention of 65 million iPhone 5 units? (the WSJ has since removed the reference to the alleged 65 million) Both articles make it clear that the orders concern just iPhone 5 components, not total iPhone 5 and iPod touch orders.
It makes no sense that Apple would order 65 million iPhone 5 units for the typically weak second quarter, especially when Apple knows that their cheaper iPhone 4 and iPhone 4S are cannibalizing some sales of their flagship smartphone.
Many investors were quick to point to China. Apple CEO Tim Cook and Senior Vice President of Worldwide Marketing Phil Schiller were spotted in China (albeit in Apple reseller stores) within the past few months, reportedly to work out a deal to bring the iPhone to China Mobile. Just this past Thursday, Cook met with China Mobile Chairman Xi Guohua to discuss an arrangement. If a deal was agreed upon only to somehow fall through a short time later, if a deal was even reached at all that Thursday, then Apple would have to cut down its order for 4-inch Retina displays, if Apple did place an order for 30 million 4-inch Retina displays at all. However, it makes little sense that Apple would expect to sell 30 million iPhone 5 units in a seasonally low quarter on one new carrier.
Regardless of whether the reports make sense or not, Apple’s stock tanked, closing at $485.92 on Tuesday. Apple’s value has dropped more than $200 per share since reaching an all-time high of $705.07 in September. The initial decline was due to higher margin requirements at clearing firms and uncertain tax rates on capital gains coming this year, which prompted mass sell-offs.
But there’s more to it than that. Independent trader Joe Springer, in November, mentioned that during Apple’s summer stock surge to an all-time high, investors placed an unusually high amount of call options on the stock. There were so many call options on Apple’s stock that there was simply not enough stock to hedge without driving the price higher. Interestingly enough, a mass share of these calls, with a strike price of $550 and higher, will expire on January 19, 2013. Four days from now. The investors that wrote those call options and bought common stock to cover will make a lot of money if those options expire as worthless and Apple’s stock rises after the expiration date.
If Apple’s stock rises to $700 before January 19, the options have an intrinsic value of $600,000,000 (Springer’s math: 60,000 call options X 100 shares per option X $100 intrinsic value per share = 600,000,000), meaning that these call writers will lose out on $600 million dollars. On the contrary, if Apple remains below $550, then surges again back to the $700 range, the call writers will recieve the capital gain from the stock they covered with and the amount for which they sold the option. Keep in mind that this is only with a single strike price that Springer calculated. With the all the strike prices combined, it adds up to billions of dollars - as long as there is a delay in an Apple surge.
The above has led some to believe that the WSJ and Nikkei published the alleged 65 million articles in order to manipulate the price of Apple’s stock in favor of the aforementioned call writers, who would cash in on the billions of dollars at stake, somehow benefitting the Journal. While it is unlikely that anyone is benefitting from publishing the alleged 65 million except for the call writers, it is still, at least, an interesting situation.
To make matters even more interesting, the New York Times confirmed that Apple is cutting back on orders of the iPhone 5, but cited a source and mentioned different numbers. Paul Semenza, an analyst at NPD DisplaySearch, told the NYT that Apple had expected to order 19 million 4-inch Retina displays for the iPhone 5 but cut the order to 11 million to 14 million for the second quarter. Semenza told the NYT’s Brian X. Chen that the numbers came from sources in the supply chain. However, Semenza believes the reduction in orders for displays is related to excess inventory. As I mentioned earlier, the iPhone 4 and iPhone 4S, which use a different 3.5-inch Retina display, could be cannibalizing iPhone 5 sales, thus decreasing the demand for 4-inch Retain displays, and ultimately the iPhone 5 (total iPhone units sold would still meet analyst expectations for the second quarter).
Apple writers and fans went up in arms after reading the alleged 65 million reports and demanded that the company release a reassuring statement in an effort to raise the stock price. Some explained Apple’s silence on the matter with an SEC rule, saying that a company cannot talk publicly about itself in the weeks leading up to an earnings report, as it is in a “quiet period”. However, it is a well known fact in the finance world that companies have been citing rules from the U.S. Securities and Exchange Commission as reasons not to discuss anything related to corporate operations. The “quiet period” rule mentioned is simply a practice, not an actual rule.
Regardless of any of the above, we will not see any comment from the Cupertino, California-based company. Apple strictly follows the teachings of their late co-founder, Steve Jobs, who was never concerned with the company’s stock price.
LeBron James is arguably the best player in the NBA. For those who don’t follow professional basketball, “King James” was highly promoted in the national media as a future NBA superstar while a high school sophomore. He was selected with the number one pick in the 2003 NBA Draft by the Cleveland Cavaliers the following year. James was named NBA Rookie of the Year in 2003–04, NBA Most Valuable Player in 2009, 2010, and 2012, and has been both an All-NBA selection and an All-Star every season since 2005. James led the Cleveland Cavaliers to consecutive playoff appearances from 2006 through 2010.
In 2007, the Cavaliers. led by James, advanced to the NBA Finals for the first time in franchise history. Many compared LeBron James to the greatest basketball player of all time, Michael Jordan.
However, these comparisons do not sit well with others. “LeBron James doesn’t have an NBA Championship ring,” some say, “so he is nothing compared to Michael Jordan (Jordan led the Chicago Bulls to six NBA Championships).” A camp, dubbed “We Hate LeBron” by journalists, emerged shortly after James’ first Michael Jordan comparison.
Earlier this week, my favorite sports writer, Rick Reilly, wrote about James. “Anything short of an NBA title makes James a useless wad of pre-chewed pork gristle in your eyes. Whatever he does — three MVPs in nine seasons — it’s never enough,” Reilly writes.
Reilly points out James’ remarkable record as a professional athlete. James has not refused to speak to reporters after a single game this season, has not called out his teammates for their poor play, has not gotten his coach fired this season, has not been fined for criticizing referees, and has not asked to be traded, released or named general manager.
“Has he punched anybody? Choked anybody? Screamed at any parking valets? Smashed a chair? Drop-kicked any equipment? Tiger Woods does that on the front nine,” Reilly continues. “The reason you hate LeBron James the most is that he just doesn’t seem to suffer his failures as much as you’d like him to.”
Sound familiar?
The consensus forecast amongst 51 polled investment analysts covering Apple advises that the company will outperform the market. This has been the consensus forecast since the previous forecast, advising investors to purchase equity in Apple, waned in September 2011. The 44 analysts offering 12 month price targets for Apple have a median target of $740, the high being $910 and the low estimate being $270. The current median estimate is a 27.52% increase from the last share price of $580.32. Apple’s latest earnings on April 24, 2012 reported Q2 2012 earnings of $12.30 per share, exceeding the $10.04 consensus of the 45 analysts covering the company. Apple’s revenues for the full year 2011 were $108.25B, 65.96% above the prior year’s results.
Despite a 54% increase in revenues, Apple “failed” to meet investor expectations for Q4 2011. However, instead of faltering, Apple recovered, exceeding investor expectations for the next quarter and reaching an all-time high of $644 in early April. Similarily, LeBron James left the Cleveland Cavaliers, infuriating his fans, and led the Miami Heat to an NBA Finals victory.
Apple has not won their NBA Championship. Like LeBron James, Apple’s stellar performance that is diminished in the eyes of silly analysts will continue to hold the company back from being “enough.”
Jessica Vascellaro, WSJ:
In recent weeks, Mr. Cook has tended to administrative matters that never interested Mr. Jobs, such as promotions and corporate reporting structures, according to people familiar with the matter. The new chief executive, 50 years old, has also been more communicative with employees than his predecessor…
John Gruber, Daring Fireball:
I like to think that in the run-up to his final keynote, Steve made time for a long, peaceful walk. Somewhere beautiful, where there are no footpaths and the grass grows thick. Hand-in-hand with his wife and family, the sun warm on their backs, smiles on their faces, love in their hearts, at peace with their fate.
“Next March I’ll be in my eighties, but to look at me you’d think I was only in my sixties because I’ve taken care of myself, looked after my health, and I love work. I think retirement is the worst of western societies’ institutions. When people retire they become detached, grow old and stop looking after themselves. Enthusiasm for life dies out and energy levels drop, and they effectively kill themselves, even though they’re still alive. I’m not planning to retire even if I leave my position here after a year or two. I’ll dedicate myself to writing, I might write a book or two. My daughter is a very successful novelist with five books, and I plan to move on from my work, and I’m thinking of writing about the Arab World, perhaps a historical narrative with analysis for the future.”
Assorted Slices is an editorial-based publication covering Apple Inc. and similar topics.
