Trade Alert: A is for Apple iPad, J is for Jack

It’s time to buy Apple AAPL again.  I’ve been saying that Apple is going to $1000 by 2015 since more than three years now, since the stock was a small fraction of its current quote. A little bit of the reasoning to refresh your memory:

The stock’s still cheap, yes, even at $250 per share. And yes, even though it’s up from $7 just eight short years ago. That’s because of good ol’ fashioned earnings again. The stock’s only trading at 14 forward P/E multiple. And when you take into account all that cash, it’s only a 12 price to enterprise value multiple. This, for a company growing earnings 20-30% per year and positioned to keep doing so for a decade.

Apple has doubled since then and I am now starting to tell my TradingWithCody.com subscribers (free trial membership through July 4th) to buy on weakness. Why? Because Apple is poised to double again. Right now I can hear two distinct camps, the traders and the techies, shouting at the screen (and you should see some of the emails I get, they yell there too).

Let’s dispense with the momentum traders first, the ones who loved the stock back in March  when it was making new all-time highs every day (while I telling you to trim and not chase it) and who think it’s just  dead money.  You’re dead wrong.  I’m no chartist but let’s glance at a chart of Apple from the last year:

Again, not a technical analysis person, and I stay away from terms like ‘consolidation’ and ‘building a base’, what I want to stress is that everyone thinks Apple is the most overanalyzed, most obvious stock pick—until it reports a blowout quarter or new product and the thing just takes off.  I still remember getting emails from my hater-hedge-fund friends back in 2010 when David Einhorn was buying Apple for his Greenlight GLRE partnership:

“What a lazy stock pick”, “He should stick to shorts he got blown out betting on ethanol”, and the best one, “My dentist owns Apple.  It’s time to bail, not get long.”.

Here’s Mr. Einhorn’s reasoning for buying Apple at an average price of around $250:

“While growth over the next few years will certainly be slower than it has been over the last few years, (Apple) does not appear to have fully penetrated its market opportunities,” Einhorn wrote. “Accordingly, the opportunity to invest in this leading company (with a better financial profile than market participants seem to acknowledge) appears iTractive (attractive).”

iTotallyAgree.  Apple isn’t going to quadruple it’s cash hoard in the next few years but I predict it will double to $200 billion (even with a dividend) and will earn around $100 a share.  You don’t need to believe in a coming iPanel or iCar to get to those numbers; the number of people who own iphones and ipads and will buy new ones in the next five years, because that’s just what people do, start to add up quick.  Apple has already started on a planned obsolence of the original ipad and I suspect there a couple million OG owners who skipped the last two upgrades.  So fast money guys and gals out there, trade around and use your fancy options strategies but start building a core Apple positions now.  Owning Apple at $500 is the new owning Apple at $250.

Now to you my nerdy brethren who have been emailing all week about the new ipad competitors.  The internets are agog every time there’s a new Android tablet, hoping for an ipad killer.  This round it’s Google GOOG stirring up the pot, releasing their own hardware+software build with the $199 Nexus 7.  Think about that for a second. Mountain View is so threatened by Apple’s domination of the tablet space that they’re willing to tick off hardware partners and put out their own device.  Why would they do that? Bottom line it’s because Android is totally fragmented and totally sucks, and without a flagship device it’s not going to survive the next generation of the ipad.  If you want a good laugh go read the Buzzfeed story “How to install Instagram on your Android phone is 23 easy steps”.  Android can hang on for mobile phones because device makers need an alternative to iOS but tablets are a totally different game and no one’s been able to produce an ipad competitor.

So Google is shipping the only defensive play they can, a $200 sub-tablet that they hope will create a bigger user base of Android tablet users, even as they lose money on it.   Amazon has a similar strategy, they’re losing $50 on every $199 Fire just to build a user base.  And if they really do put out a metal 10-inch tablet next year, they’ll lose even more money on it because they just don’t have the supply chain that Apple does.  Every Android tablet is a race to the bottom, and at best they’re going to be splitting 25% of the market and less than 20% of the profit share.

What about the Microsoft Surface? No really, I mean what about it, why are we even talking about it? Yes it would be a radical departure if Microsoft starts making hardware but we’ve seen this story before. Actually three times before.  Below is Bill Gates in 2002 launching the Tablet PC platform:

Softee tried again in 2006 with the UMPC platform.

Asus UMPC

And here’s Steve Balmer giving tablets another shot in 2010 with Slate:

So color me skeptical for thinking that Surface is Microsoft just a rhetorical kick in the ass to PC-makers. That would be along the lines of  ”Hey! We have an enormous installed enterprise base! Make something for them!”  Notice how Microsoft didn’t say anything about the Surface’s price? That’s because you can get a brand new ipad 2 for $400 and even a dollar above that would be disastorous.  Microsoft is doomed to be yet another tablet maker that can’t compete on price, especially if Surface runs on ARM ARMH chips.  50-50 if the Surface ever comes to market and sells more than say, 1 million units total in this country and maybe 5 million worldwide, but I’m pretty darn confident that Apple will keep dominating the tablet space with the monster margins of the ipad.

I’m going to add to my Apple position today. Apple’s already one of my top 3 largest positions and I’ve got much lower cost basis than today’s quote, but I’m going to nibble on some January 2013 calls, looking around the $650 up to $700 on the strike prices.

 

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