U.S. Markets open in 7 hrs 51 mins

For The First Time In The Tim Cook Era Apple Is Finally Firing On All Cylinders

Jay Somaney


To say that Apple shares have been a stellar performer in 2017 is an understatement. Shares of the most valuable company in the world are up 17.2% (closed at $135.72 on Friday) thus far in 2017 , versus the Nasdaq which is up 8.5% and compared to the S&P 500 which is higher by 5.1%. Incidentally, Apple shares hit an all-time high of $136.27 per share on Wednesday intra-day and are the best performer in the Dow as well for 2017.

Despite all the shouting, noisy warnings and copious hand-wringing about how dire things were at Apple and how the naysayers and darkside swamis and gurus were doing shareholders a huge favor by warning of the impeding calamity, Apple was able to report outstanding numbers for the December quarter.

That is where the good news began for Apple and has continued as of last week and will more than likely continue for the rest of 2017 and into 2018.

Going into the earnings print we saw the following mix of headlines from the sell-side:

Apple valuation prices in little growth, says UBS.

Apple guidance likely lower than many expect, says JPMorgan.

Drexel Hamilton sees Apple 'slightly' exceeding EPS consensus tomorrow.

Apple should be bought on any significant weakness, says Pacific Crest.

The above were just a sampling of the surge in negativity we saw from almost everyone going into the earnings report.

At least the analysts from Drexel and Pac Crest were mildly positive going into the earnings print.

Then came the numbers and we saw the following headlines cross the wires soon after and the next morning:

Apple CEO: iPhone 7 was best-selling smartphone in China during quarter.

Apple price target raised to $138 form $127 at UBS.

Apple price target raised to $142 from $114 at JPMorgan.

Needham remains bullish on Apple after 'excellent results.'

In the first week of February, market research firm Strategy Analytics came out with a report that estimated that global smartwatch shipments in Q4 were up 1% to 8.2 million units with Apple shipping a whopping 5.2 million units while Samsung came in number two with an estimated 800,000 units shipped in the quarter. Prior to that report from the firm, Tim Cook had already confirmed that Apple was having a stellar quarter as far as the Watch was concerned.

A fortnight or so prior to the Apple Watch report from Strategy Analytics, we had reports (state of the global PC business) from IDC and Gartner, both showing that Apple had also picked up share in the PC segment in Q4:16 despite the overall business seeing another year-on-year decline.

Also in the first week of February, we had the following announcement from Indian IT minister, Priyank Kharge, who tweeted, "Glad to announce initial manufacturing operations of the world's most valued company: Apple, in Karnataka. Another validation for Karnataka." The minister further added, "Apple's intentions to make iPhones in Bengaluru will foster cutting-edge technology ecosystem & supply chain development in the state."

I guess that puts paid to the question weighing heavy on a lot of investors minds regarding Apple's intentions and plans for the the Indian sub-continent, the world's fastest growing cellular/smartphone market.

Ten days or so ago we had another research firm, Canalys, come out with a report that Apple shipped 6,000,000 (topping the number estimated by Strategy Analytics) smartwatches in 4Q16. Canalys noted a new shipment record for the smart device segment. The Apple Watch generated more than $2.6B in revenues for Apple in the quarter, making up nearly 80% of total global smartwatch revenues, according to Canalys.

A lot of us have been pondering over what could be the next big thing as far as Apple is concerned going forward. Last week, Apple CEO, Tim Cook gave us a hint of things to come in an interview with The Independent. While talking about Augmented Reality, Cook said " (A/R is) a big idea like the smartphone. The smartphone is for everyone, we don't have to think the iPhone is about a certain demographic, or country or vertical market: It's for everyone. I think AR is that big, it's huge. I get excited because of the things that could be done that could improve a lot of lives... But there are things to discover before that technology is good enough for the mainstream."

Last week, market research firm Gartner published its estimates of Q4 global smartphone sales, which it said rose 7% to 432M units. Gartner stated that  Apple overtook Samsung  as the world's top smartphone seller for the quarter, with units up 8% to 77M while the latter dropped 8% to 76.8M. Gartner commented that "it has taken eight quarters for Apple to regain the No. 1 global smartphone vendor ranking, but the positions of the two leaders have never been so close, with only 256,000 units difference. The last time Apple was in the leading position was in 4Q14, when its sales were driven by its first ever large-screen iPhone 6 and 6 Plus." Anshul Gupta, research director at the firm, added, "This is the second consecutive quarter in which Samsung has delivered falling quarterly smartphone sales... Samsung's smartphone sales started to drop in 3Q16, and the decision to discontinue the Galaxy Note 7 slowed down sales of its smartphone portfolio in Q4. The withdrawal of the Galaxy Note 7 left a gap in its large-screen phone range."

Finally, also last week, Warren Buffett's 13F filing showed that Berkshire Hathaway, had quadrupled its stake in Apple in the December quarter and now owned 57.4 million shares of the company.

Of course,the well-meaning naysayers continued to chirp away that Berkshire could have sold part of or all its Apple shares in this current quarter since 13F's are filed (within) 45 days past the end of every prior quarter. However, the fact is that Warren Buffett has always been a very long-term investor as evidenced by his investment in IBM which has done relatively nothing since he purchased a big slug in 2011 and only recently (since its Q4 earnings in mid-January) begun to show a profit for him.

More than likely, the chances are far higher that he could have continued adding shares in Apple even in this current quarter. 

Most importantly, for Apple to trade at a discount to Microsoft given the higher growth rates going forward in earnings compared to the latter (Apple expected year on year earnings growth of 13.4% compared to 9.4% for Microsoft), has made very little sense and that valuation discount should also change going forward. That is not to even mention (besides all the stuff listed above), the significant strides Apple has made in its services business, which is getting stickier by the day, and now has revenues enough to put it in the Top 100 of the S&P 500 companies ranked by revenues as a stand-alone company on its own.

Given the fact that for the first time in the Tim Cook era, Apple finally seems to have everything lined up perfectly, the million dollar question remains,  "Will investors choose to see the opportunity in Apple now or whether they will see it later at higher price levels?"

(Long aapl, long and short options)