A Techie’s Guide To The Future Of Tech Stocks: Apple

As a developer who constantly works with technology, I follow all the happenings in the tech world, especially the mobile world. I also follow the major players’ stocks and I look at them from the perspective of both an advanced user who often needs to support these devices and an investor.

With this series of articles that I will write in combination at this blog and at The Motley Fool (an updated version of this article is here). I’m going to present my opinion on the state of technology at the largest tech companies and the future as I see it. Let me start with Apple (AAPL), the largest player in this market.

I’ve been sorely disappointed by their latest product announcements. Apple has been showing only marginal progress in device specifications and new devices, pig-headedly avoiding standards (e.g. Lightning connector) and iOS is becoming stagnant in comparison to the progress made by Android and features native to other devices such as Windows phones. Also Apple’s legal shenanigans are causing a negative impact on brand image amongst geeks. It is hard to imagine Apple shooting themselves in the foot to spite others but they are doing just that by moving away from Samsung, launching a half baked map solution, low resolution but still very expensive iPad mini. The other thing is Apple artificially restricting the availability of software on older devices like Siri on the iPad2. If the iPad mini has the same guts as the iPad2, what is the problem with getting it on the iPad2?

I have no problems with Apple’s annual launch schedules for devices as long as the devices they launch leapfrog the competition in available features. But their current patterns, initially missing LTE, then missing NFC, missing on the iPad mini screen resolution etc. are not what I would expect from a company with so much cash.

In spite of all this, the correction in the stock was overblown. Looking at the positive, the iPhone is soon to be available on China’s largest carrier and the supply issues will eventually be sorted out. Also Apple has now seemingly no existing product announcement to make in spring thanks to the iPad mini, iPad 4 and iPhone 5 all being recent. This would be an indicator that Apple might possibly announce a brand new product (an actual television) or focus more on their “hobby” – Apple TV. It could also be an indicator that they are moving to shorter product cycle updates.

Apple finally settled with HTC. I am hoping the same happens with the rest of their lawsuits and they finally see the light and get back to making good products. Maybe iOS 7 will have widgets or “live” icons and they will be a “revolutionary” invention and bring iOS into the modern world.

No matter what happens, in the near term I expect Apple to keep growing as they work out supply issues and expand the iPhone to more carriers worldwide. However longer term, the growth machine might slow down unless Apple starts improving their product lineup drastically either by introducing new products or by offering multiple variations of their products like offering top of the line hardware in 3″ and 4″ iPhone and the iPad and iPad mini and not keeping the smaller sized hardware with lesser features.

I attribute at least part of the Apple pullback to growing concern about Apple being able to meet expectations on their devices in the face of stronger and better competition from both device makers like Samsung and Nokia (NOK) and OS makers like Google (GOOG) and Microsoft (MSFT) and Amazon (AMZN).

I am holding onto my Apple stock for a few more years. I might sell small portions if the stock hits 725 in the next 6 months. I think that is quite likely. Let’s look at one rarely used but very useful metric that Apple provides – guidance. Here is a chart of Apple’s guidance vs Reality:

Apple Guidance vs Reality

From the trend it looks like Apple is moving towards more realistic guidance. For next quarter, they provided guidance of revenue of “$52 billion and diluted earnings per share of about $11.75“. So if Apple only meets this estimate, that would imply an earnings contraction from last year where EPS for Q1 was 13.9. Even if Apple beats EPS guidance by 20%, that would imply an EPS of $14.1, which is only a 1.4% increase.

There are two scenarios here:

One Apple is understating EPS and the beat will be higher. Considering that they are saying revenues will be 13% higher than last year, EPS should be 13% higher too putting it at $15.70.

The second scenario would be that Apple has a margin contraction. This is entirely possible if the iPhone5 is more difficult to produce than the reports make it out to be and/or the effect of snubbing Samsung is higher than Apple makes it out to be.

A ratio that I like to look at is how much EPS is improving compared to revenue.

Companies can fake this improvement using share buybacks but Apple is not doing that because their share count has been increasing. Also Apple’s current share buybacks are not expected to reverse this trend only flatten it.

Just a fun statistic a coworker sent me – this year at the University of Virginia there were more Macs (56%) than Windows PCs (44%) amongst moving in undergrad students. So Apple will do fine at least in the short term (next 3 years).

Disclosure: Long AAPL, GOOG, NOK



Responses to Apple’s Lowlife Behavior

On Friday Apple decided to piss off the rest of the mobile phone industry by making libelous claims that popular phones from those companies drop bars just like the iPhone 4. Each of those companies responded publicly and here is what they have to say. The thing Apple forgot to mention is that dropped bars != dropped calls. Here are all the responses collected.

The first one to respond was Nokia:

Antenna design is a complex subject and has been a core competence at Nokia for decades, across hundreds of phone models. Nokia was the pioneer in internal antennas; the Nokia 8810, launched in 1998, was the first commercial phone with this feature.

Nokia has invested thousands of man hours in studying human behavior, including how people hold their phones for calls, music playing, web browsing and so on. As you would expect from a company focused on connecting people, we prioritize antenna performance over physical design if they are ever in conflict.

In general, antenna performance of a mobile device/phone may be affected with a tight grip, depending on how the device is held. That’s why Nokia designs our phones to ensure acceptable performance in all real life cases, for example when the phone is held in either hand. Nokia has invested thousands of man hours in studying how people hold their phones and allows for this in designs, for example by having antennas both at the top and bottom of the phone and by careful selection of materials and their use in the mechanical design.

RIMM’s  response:

Apple’s attempt to draw RIM into Apple’s self-made debacle is unacceptable. Apple’s claims about RIM products appear to be deliberate attempts to distort the public’s understanding of an antenna design issue and to deflect attention from Apple’s difficult situation. RIM is a global leader in antenna design and has been successfully designing industry-leading wireless data products with efficient and effective radio performance for over 20 years. During that time, RIM has avoided designs like the one Apple used in the iPhone 4 and instead has used innovative designs which reduce the risk for dropped calls, especially in areas of lower coverage. One thing is for certain, RIM’s customers don’t need to use a case for their BlackBerry smartphone to maintain proper connectivity. Apple clearly made certain design decisions and it should take responsibility for these decisions rather than trying to draw RIM and others into a situation that relates specifically to Apple.

Motorola’s Response:

It is common knowledge in the industry that antennas on the outside of products have known issues, and despite the fact that they lead to smaller phones we have avoided them because consumers don’t like being told how to hold the phone. While the whole industry has to deal with phones being held in different ways, it is disingenuous to suggest that all phones perform equally. In our own testing we have found that Droid X performs much better than iPhone 4 when held by consumers.

HTC and Samsung:

“The reception problems are certainly not common among smartphones,” HTC Chief Financial Officer Hui-Meng Cheng said. “[Apple] apparently didn’t give operators enough time to test the phone.”

Samsung said it “hasn’t received significant customer feedback on any signal reduction issue for the Omnia II” smartphone that was featured in Apple’s video.

Click for demo from Apple’s Antenna Designer

If CEO denies rumor, it must be true?

Every so often we see merger, takeover and failure rumors floating around. Then the CEO of the company says that the rumors are all false. Before the Wachovia collapse that happened on a Sunday, the CEO went on TV on Friday to let investors know that his bank was not in bad shape. Jim Cramer apologized for being duped.

Palm’s CEO also indirectly squashed takeover rumors by saying “We’ve said we have a plan that takes us to profitability.” However takeover rumors continued and finally Bloomberg seems to have confirmed the rumors making Palm’s stock surge.

It is sad to see Palm go and hopefully the new buyer will be someone who will continue WebOS, which is widely regarded to be the best of the smartphone Operating Systems with real multitasking, easy development and great features from ease of use to great looks.

I’m keeping my fingers crossed that it is HTC and they will put WebOS on something like Evo hardware.  My HTC Touch Pro is now aging but I think I can wait a while to see how 4G pans out before upgrading. I was seriously considering a Palm Pre Plus until PALM’s latest earnings report.