My double down

Why Apple will continue to be sweet for long long time

As I have recently written, the sentiment for Apple cannot be worse at the moment. All the sudden it has fallen from the heaven to the hell, all within just a short few weeks! So much so that Apple lost 25% of its share prices from the recent peak and been well in the bear market territory. I really have to laugh how quickly people’s sentiment can change but I have seen too many times. I’m used to it for sure!

So what has made such a quick bearish turnaround for the Apple’s sentiment? The declining trend for iPhone sales, period! Indeed, thanks to the genius, Jobs’ revolutionary innovation to bring the birth to iPat and iPhone less than 10 years ago, the demands for iPhone and iPad have progressively increased since its birth and 80%+ revenue for Apple has been concentrated in the device sales. Naturally when the investors sense any slowdown of the device sales, panic will easily hit their heart. Understandably people will wonder how Apple can maintain their profitability moving forward if their bread and butt cannot sell well. I do share their concern. But apparently not many people understand that Apple has already made great efforts to shift its business model from device-centered towards services-oriented. Here is the fact: Apple made $18 billion in services revenue in 2014, which has already doubled to $37.19 billion this year. But the trend is not going to slow down. It is estimated that Apple's services revenue will more than double again by 2022 to $80.65 billion and will jump to $101 billion just one year later per Morgan Stanley analyst Katy Huberty forecast. More importantly, the fast increasing services revenue will also drives up its profit margin, estimated to be over 50% for its gross margins on Apple's services, compared with the current average margin around 40%. Below is the chart made by Morgan Stanley regarding the increasing contribution from the services to its earnings per share and accordingly declining importance from the device sales. In other words, moving forward, the device sales from iPhone/iPad or Mac won’t be so critical anymore for Apple’s profitability. This is critically important for Apple as services revenue is more predictable and reliable as users tend to come back again and again if they have already started to use the subscription-based services. This is the case not only for Apple but virtually for any companies for this matter. Do you know why Microsoft has revived so much in the past few years? Many major and critical transitions have contributed for sure but one very important factor is its transition from selling it products (like Office) as a one-time product to subscription-based annual usage fees. Its sales have increased several times since the transition! Apple is just doing that. If Apple can just maintain the current P/E around 18, the fast increases of the EPS by 2022 will easily make its share price double from the current depressing price.

By the way, I’m not trained in finance at all but I can easily understand how positively these changes can fundamentally make to Apple moving forward. But I’m indeed wondering how those so-called professional analysts who are supposed to know all these jargons better than me cannot seem to get the points easily. You may not believe but it is often the case that most analysts are also behaving as herd. You may notice that they often upgrade in cluster when everyone is upgrading a company and then downgrade when everyone is downgrading. Just a few weeks ago, you would see majority of them rating Apple as buy or strong buy when the sentiment for it was clearly too euphoric. Now all the sudden, you hardly see strong buy anymore and many have downgraded it in rush. This is the time you should consider to buy, not sell or run away.

I lately have traded Apple twice since it got crashed after the earnings, both of which made me some good quick money. Last week when Apple was above $180, I told my friend to watch for the $170 level as it is clearly a strong support level, although I cannot say it is necessarily its ultimate bottom for this correction. Emotion can make things a lot worse than expected. Where we got the low testing yesterday where I got in again for a short term trade, although I didn’t get the best prices. It went up immediately during the day and I thought it had successfully tested its low for this time. Well, apparently the market does not want to make anyone’s life easy and today Apple got sold off hard again and even went down below 170 a bit today. I really like its technical setup for the near term and I took the opportunity to double down. Will I be lucky again this time? Only time can tell but I’m confident it will be another winning trade as well!