Joke: Apple is now cheaper than Dell, Hewlett-Packard

Apple Inc.’s “Q1 was hardly a ‘bad’ quarter. Revenue rose 18% as reported, and when adjusted for weeks (last year had an extra week), revenue was up 27%, about in line with the last few quarters. Gross margins dipped to 38.6%, well below Apple’s 40%+ numbers for the past 3 years. This should be little surprise – Apple’s markets have grown quite crowded, with many competing devices being sold at cost. So maintaining a decent normalized growth in profits isn’t too bad. And let’s not forget Apple’s absurd $137 billion in cash and debt-free balance sheet, because a lot of “investors” ignore it,” MagicDiligence writes for Seeking Alpha.

“All that said, I was disappointed in the quarter. And not for the reasons being popularized in the media,” MagicDiligence writes. “I believe Apple shot itself in the foot by refreshing virtually its entire product line right before the holidays… Tim Cook made his bones as a highly renowned operations manager. This is what he’s supposed to be good at. But we’re getting some concerning red flags here. The hiring and subsequent firing of former retail head John Browett was an embarrassment (retail same store sales were up only 2% in the quarter, another concern). Cook still hasn’t hired a replacement. Firing Scott Forstall was another big risk, but we’ll see how that goes. And now some poor planning and execution on new product launches.”

MagicDiligence writes, “All this said, Apple’s valuation right now is comical. Its EBIT/EV earnings yield is 18.1%, which is far higher than stagnant, declining competitors like Hewlett-Packard (HPQ) (16%) or Dell (DELL) (12%). That’s just funny.”

Read more in the full article here.

MacDailyNews Take: As we wrote yesterday, in part:

If you wish Apple simply had their iMacs ready when they were supposed to be ready and not two months late, thereby missing out on approx. 1+ million holiday quarter Mac unit sales (which would have just so happened to contribute more than enough to beat the Street soundly), you’re probably long AAPL… If you know anything at all about Apple product supply/demand, you know that Apple customers have proven they will wait. Therefore, you understand that sales of iMac, iPad mini, and iPhone 5 (all of which were constrained during the last quarter) will be pushed into this quarter, with its drastically lowered expectations, which means you’re thinking ahead.

51 Comments

    1. ‘Cheaper’ terms of stock price versus investment value. Investment value covers a wide range of factors, a key one being the Price/Earnings (P/E) multiple to Growth, or PEG. In the 2000s, Apple has had relatively modest stock appreciation relative to its earnings growth. Even a ‘disappointing’ quarter provided 18% earnings growth year-over-year, and that was really 27% if you adjust for the number of weeks in the quarter. Yet its P/E multiple is low, especially when you discount the cash and securities against its market cap. Even before the recent plunge in AAPL, its P/E multiple was around 15, so its PEG was 0.56. For a healthy company with good prospects, a PEG less than 1 is a buy indicator.

      By the way, you need to differentiate between P/E based on trailing (last year’s known earnings) versus leading (predicted) earnings. In the end, investing mainly depends on how a company will fare in the future. For a dependable and steady company, the future can often be predicted with some accuracy based upon its past performance. But we are in unsettled economic times and many investors are skittish and looking to jump ship at any sign of a downturn, whether broad-based or limited to a particular sector.

      From what I know about investing, the only reason that AAPL is plunging to ridiculously low levels right now is that a significant number of major investors seem to believe that Apple’s earnings will soon drop into the toilet – that iOS will be marginalized over the next few years by competitors and the major cash cow for Apple, the iPhone, will not continue to sell as well as it has over the past few years.

      Personally, I disagree with the doomsayers and I plan to buy as much AAPL as I can afford. But you have to make your own call. If I were always right, I would be very wealthy by now and I would own a Mac discussion forum so that I would not have to put up with Fwhatever and his anonymous pals.

      1. I understand some of that! It was being cheaper than Dell, HP, as in the title of the article, that I was referring to.

        The price was driven down to 500, as I read somewhere, by rumours so that traders could cash their options. This is illegal—if it isn’t it should be—and should be investigated.

        I agree with you about why it has continued to go down and it’s a good buying opportunity. The doom-mongers have been consistently wrong about Apple.

      2. You don’t need to be wealthy to have a mac discussion forum.

        Once you got it rolling it would begin to take care of itself, and begin to net you money. You certainly make good enough points on here to host your thoughts on a site. I’d bookmark it!

  1. I ordered two 27 inch iMacs on 12/7 for work. One of them was for a group that I talked them into getting a Mac for a project. They are pissed and have a very bad taste in their mouth from this experience. After delays, they were supposed to ship in the 18th. The 18th went by..we called..and now have no ship date in site.

    Absolutely ridiculous.

        1. Supposedly, most of the delay was due to display panel yields, although I did hear of weld-seam problems for the body. Although it seems as though Apple might be going overboard when it comes to build quality, it’s one of the few things that differentiates Apple from other computer makers. I think it definitely pleases consumers but Wall Street hates that sort of thing because it’s a drag on production quantities and profit margins. Wall Street would prefer everything to be made of plastic and relatively breakable so that consumers would have to purchase products at a higher frequency. I really hate that mentality and have never purchased any products in that manner. I buy my products to last. My last 24″ iMac has been running 24/7 for three years straight and works as well as the day I bought it. And it was a refurbished model from the Apple online store.

          Anyway, I’ll continue to hold on to my Apple shares I purchased in 2004 and just hope Apple does something to shore up the share price whether by new products, buybacks or a split. Maybe Apple could make a decent acquisition with some of that cash, but that doesn’t seem likely at the present. It may take time, but I’ve got other money to use, so there’s no urgency to sell my stock just because of the last six months didn’t turn out so well. I’ll take my Apple dividends and just use that money for various things I might want to splurge on.

          1. LB48,

            Yeah, Apple is in terrible straights… Of course did you look at the market this morning. The prices are climbing straight up.
            It went from below 436 to 445 in like 15 minutes.

            Also, they are finding reporting dumping of like 800,000 shares in a computerized fashion, That is 300 million $ of stock. Someone is playing the market and as stock now rises almost to 446 as I type this, someone is buying like crazy.

            Can you say “manipulate the market”?

            Just a thought.
            en

      1. really? spectacular? a CPU upgrade…expected, Fusion drive….expected, hobbled 21.5…..not expected, seriously difficult manufacture all because Apple is going anorexic…not expected.

        The design could easily have been similar to the previous, but just not so ultra thin. The SD slot could have been on the underside….more accessible than on the back.

          1. “superior design” is dimnishing returns at this point. whats the obsession with thin and removing ports just so it looks sexy.

            has pple learned nothing from the betamax v. vhs wars?!

            1. I don’t think Apple sees it that way, though the marketplace will be the final arbiter. It is moving to an ultra-thin, aluminum-case format for its entire product line. Because of economies of scale and ownership of specialized tools, it can produce these high-quality, easily-recognized devices at far lower cost than rivals — not as cheaply as plastic, but at a price that large numbers of consumers can afford.

              One seldom discussed benefit of ultra-thin iMacs is aesthetic appeal, so they complement offices, retail settings and living rooms, and portability, which allows them to be moved from place to place in a few moments.

              Now that Apple is well into the transition of producing this family of thin/aluminum iDevices (really iComputers), it has discovered that more time is required to manufacture and assemble them than originally planned.  That adds a few dollars to production costs (per item), which is not much of a problem for a company with high margins.

              However, the slower-than-expected assembly process also created a short-term production bottleneck (supply constraint) during the period when a larger-than-expected work force and additional assembly facilities could be brought together.  We see this taking place in a report periodically filed by Apple, which indicates that an additional 100,000 workers were added to the supply chain in November alone, and tens of thousands of existing workers shifted to heavy-overtime work loads. Not only were Foxconn’s assembly lines beefed up, but Apple has reached out to other assembly companies (especially Pegatron) to accommodate the demands of its new- generation devices. 

              While outsiders wonder why Apple committed the ‘blunder’ of introducing so many new products within a compressed time frame, it seems that top Apple managers wanted to get on with the transition. If one is unconcerned with the stock market’s reaction, then it makes sense to make the shift to ultra-thin, all-aluminum iDevices in relatively short order. Once it becomes clear to consumers that a new iXXX will soon be launched, then sales of the old-model iXXX contract fairly sharply … and that lowers earnings, possibly as much as the production bottlenecks during the transition period (evidently about 2-4 months per product).   The decision to make the transition is more heavily tilted toward ‘now’ rather than ‘later’ if Tim Cook (mistakenly) believed that the production bottlenecks would be shorter (say, 1-2 months) than actually occurred.  There are reasons to believe that Cook was, in fact, surprised by the length of the supply constraint for iPhone 5’s.

              One advantage of having a family of ultra-thin, all-aluminum iDevices/iComputers is to maximize the ‘halo effect’ among consumers: those who strongly prefer the unique design and build of one Apple product will — other things being equal — tend to purchase another Apple product over those offered by competitors.  The user of an iOS device may feel any loyalty toward a computer with an OSX operating system, but the user of a thin, aluminum iPhone 5 may feel a strong pull toward a computer with the same superior design.

              The transition involved many ‘moving parts’: design and engineering, equipment purchases, materials acquisitions, thorny contract negotiations — so it seems likely that the decision to shift to the new design was made while Steve Jobs was still alive.

              I am certainly not attempting to speak for Apple, so maybe my perspective misses in several ways.  However, if one doesn’t know any more than “betamax v. vhs wars” in evaluating Apple’s decision to transition its product line, they are just adding more background noise. Everyone has a right to opinion, but they are under no compulsion to share it …

    1. Sorry to hear that. I am sure that Apple is doing its best. You knew that Apple was phasing in production, so you chose to take the risk of ordering during a product transition. But I agree that Apple needs to meet its shipment commitments.

    2. Ordered my 27inch iMac 12:01 am PST on 11-30-2012. It was a known fact ahead of time that 27 inch iMacs would not be available immediately. I was given a delivery time of 12-18-2012 through 12-27-2012. I didn’t believe it but I ordered anyway. It was delivered 12-17-2012. I was very happy as it was a gift. A Christmas present. Delivery times slipped even on the day that I ordered. If you didn’t order in the first hour or so you were out of luck. And MDN is correct about the iMac and Mac Pro sales hurting the Q1 earnings. The problem was that going into sales release of the new iMacs, the old iMacs had been depleted weeks ago. You couldn’t buy an iMac in particular a 27 inch iMac. Sure, many potential iMac buyers will wait but that doesn’t matter at earnings call. Next quarter is next quarter. You either sell them or you don’t. It’s a reason that is used as an excuse by some (MDN) but in the end, sales are what matter. That would apply to anyone, Microsoft, Samsung etc. I’ll bet that doesn’t happen again. If you are having production problems with a new product that has to be factored into the halting of production of the old model. It wasn’t intentional on the part of Apple but it was a huge mistake nonetheless. As much as I think Tim Cook is doing a pretty good job I believe he holds the responsibility for that. And that error cost them a good Q1 earnings. The unavailability of the iPhone 5 in Q1 really hurt the earnings call also. These things matter. I know they’re trying to fix production issues but they need to do better. Results. Results is what matters.

    3. I forgot to mention.. we actually ordered the Macs in October.. the previous model. That order was delayed, and Apple eventually cancelled the order. When we asked if they could transfer the order to the new model, the told us we had to resubmit and start with a new order from scratch with the new models. So.. its been almost 5 months since the initial order.

      I forgot to mention that… its been so long, I almost forgot it happened.

  2. I’m one of those going long on AAPL (I can afford to- I paid $8/share). But I also agree that when supply is low, sales will just move into subsequent quarters. Macs and other Apple products last for years- they aren’t consumables like most competing products. There is also intense brand and OS loyalty. I bought a new iPhone 5 this quarter. Why? because unlike last quarter, I needed one (my iPhone 4 died). I had planned to buy one soon anyway, and prefer to wait until there are accessories available and I can just walk into an Apple store and buy one (any size or color) on the spot.
    Thanks for such a good article.

      1. And you only have to look back less than three weeks to see MDN’s most recent Dell valuation record low compared to Apple.

        Everyone is getting infected with short term vision illness. It has to be The Business Illness of Our Age. Long term? What’s that? 😯

    1. @RockSolid – – The most recent story about DELL is that Michael Dell is planning on selling off the company’s assets and giving shareholders back their money.

      This is the end of the Apple/Dell saga.  Apple has become America’s most valuable company by market cap, while DELL’s performance will soon be rewarded with the company’s shares being de-listed.

    1. Agreed. The market is saturated except for the Chinese market and the Indonesian market and the Indian market. There are plenty of well healed folks in those countries and also a growing class of professionals who will love Apple products too. Those three countries have a combined population of nearly 4 billion and if only 10% of those populations are potential buyers of smart phones etc and only 25% of those would buy Apple products then that means Apple could sell 100 million units or more.

    1. Why – they get paid to look the other way.

      The fact is that the stock market is a big game where the major player use large holdings to move the stock around.

      We all can play this game too but it can be a gamble since the results can be irrational. Looking at Apple’s fundamentals you cannot understand why the stock is trading at such a low P/E. However the institutions had a lot of money tied up in the stock and have pushed the stock down to capitalize on shorts and hedges.

    2. .. about correcting the stock market would be to change the rules so that it is no longer a casino but an investment engine as it was first designed.

      you were supposed to buy stocks to invest in the growth of companies.

      but now you have the ability to ‘short’ stocks i.e bet on the stocks falling. That’s NOT investment in growth but treating it like a casino. To short a stock like apple hedge funds spread rumours about ‘manufacturing difficulties’ ‘fading sales’ etc etc. The craziness also drives out legitimate long term investors who are now terrified of the irrationality of it all.

      The governments have sold the population B.S that instead of company pensions it is better to invest in stocks via in canada (via I now live) RRSP and the US I guess IRAs and 401ks (?) , (this was a lie pushed by companies who wanted to save money on pensions). In the old days most big companies have pensions , now few do.

      And few mutual funds (I would say ZERO) grow anywhere near what traditional pensions would have given and most retirees today are broke. Mutual funds make little after deducting management fees etc.

      Worse while encouraging stock buying governments (again under the influence of super wealthy people who invest in hedge funds, the same dudes who own the companies that ditched pensions) have created a giant casino in the stock market (where you can ‘hedge’ with options, shorts etc). Making everyone invest in retirement funds based on stocks –while having ‘casino’ rules – means the stock market is giant feeding ground for the hedge funds.

      It is a giant scam which the government in collusion with wealthy people (who fund their political election campaigns) have fostered on the public.
      Interestingly government workers and many polticians (in canada ) still get PENSIONS! politicians don’t trust the ‘invest in RRSP’ crap for their own needs.

      If governements really want people to invest in the stock market via pension plans they should stop the rules that allow things like ‘shorting’.

      stock market should about investment in growth (where you put money in companies with good fundalmentals) not a casino gambling.

  3. All I know is that Apple’s P/E continued to drop even since the iPhone was introduced. The company never seemed to ever have any growth prospects by Wall Street’s standards. I know that Apple was always considered a doomed company, but I never gave that much thought because the company was making decent money and the lower P/E might show less risk. Now I understand that a continually shrinking P/E means investors had basically given up on the company ever having any growth prospects. Now, it’s been made totally clear that as long as Apple builds costlier, high-quality products the company will never be valued as a long-term investment.

    Wall Street doesn’t care for Apple’s high profit financial model because of the inherent risk of being displaced by the preferred cheap and high-volume financial model. It does make some sort of sense, but there should always be room for companies and consumers who prefers high-quality products. Apple will likely have to compromise on margins in the Chinese smartphone market in order to stop the share price from going down to reserve cash value. It’s just so strange how the stock market perceives a company’s value based strictly on terms of growth percentage.

  4. I don’t think apple will have a big quarter this time either. Gross margins have shrunk. Profits will not be as big even with increased sales. Gross margins shrunk because of all these new products

    1. Margins should increase. Apple introduced many new iterations of products or in the case of the miniPad a new product this past quarter. This brings extra manufacturing costs which will go down over time, increasing margins.

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