Barron's: If there's any knee-jerk selling of Apple, pounce

From Erik Savitz' "Tech Earnings Will Be Dominated by Shortage Talk. Investors Beware." posted Friday:

This past week, Apple (ticker: AAPL) shares wobbled after Bloomberg reported that Apple had slashed its production plans for the iPhone 13 for its December quarter thanks to tight supplies of various chips from both Tex

as Instruments (TXN) and Broadcom (AVGO). There were other indications that the company can’t get enough camera modules for its higher end iPhones. (Apple declined to comment.)

There’s no quick solution to the bottlenecks. Electronics manufacturers in Vietnam, Malaysia, and the Philippines have reduced output in the face of strict workplace and travel rules tied to the pandemic. (Apple’s iPhone 13 Pro camera modules come from a factory in Vietnam.) And then there’s the ongoing shipping crunch. Costs for air, rail, and sea freight have soared. All of that means higher costs, leaving manufacturers and retailers with an unpleasant choice: absorbing the costs, leading to lower margins, or raising prices, leading to unhappy customers.

Investors will have their own choice to make. How to grapple with the inevitable disappointments related to the shortages, not all of which are created equal. For companies with a strong brand, shortages are more likely to just delay purchases. That should protect Apple, but it could hurt a company like HP Inc (HPQ), which makes printers. No one spends a lot of time looking for one specific printer.

In Apple’s case, tighter iPhone supply could still impact short-term financial results—and we’re likely to see estimates come down by the time the company reports on Oct. 28. This past week, Needham analyst Laura Martin chopped her estimate on iPhone sales for the December quarter by 10 million units, to 80 million. But eventually, component supply issues will be cured. And in Apple’s case, demand seems more likely delayed than destroyed.Morgan Stanley analyst Katy Huberty wrote last week that “any supply shortage just pushes iPhone sales into future quarters.” The long-term damage to Apple is likely to be zero.

Ultimately, Apple seems likely to stick to its recent pattern of not providing detailed forward guidance, and any cautious comments on the supply-chain outlook could pressure knee-jerk selling of the stock. If that happens, pounce.

My take: Nobody spends a lot of time looking for a specific HP printer or a specific Android clone.

7 Comments

  1. Fred Stein said:
    But why wait for the “knee-jerk selling”?

    The stock already sells at 15% below average PTs, a very attractive entry point. Regardless of near term turbulence, the 5 year total return looks great. More importantly, current prices substantially reduce long-term downside risk.

    5
    October 17, 2021
    • Gregg Thurman said:
      The rubber band is tighter than you think. If you eliminate Ferragu, Hall and Saccocrap from consensus you’ll find AAPL is trading at an even greater percentage below consensus.

      4
      October 17, 2021
    • Robert Paul Leitao said:
      Fred: As the Fed begins to taper bond purchases and the flow from the liquidity tap is slowed (not to mention the likelihood of interest rate increases in 2022), value investing takes on a new shine. Inflationary pressures are now deemed “persistent” and investors will be looking for opportunities to generate real gains. In other words, gains greater than the rate of inflation. Apple, if viewed as a consumer goods franchise, may rise to the top of the list of attractive defensive plays. As you mention, the shares are currently trading at a significant discount to price targets.

      1
      October 17, 2021
  2. Robert Paul Leitao said:
    Pounce on any knee-jerk selling? Sure. If I’m buying, Apple’s buying more. I’m in good company.

    3
    October 17, 2021
  3. Mark Visnic said:
    You’re all correct in my book. I was buying Jan ‘23 100 calls the week before last and will add this week at current prices through long-dated calls and short long-dated puts. This isn’t investment advice or a recommendation in any regard. It simply is what I’ve done and will do. Cheers

    0
    October 17, 2021
  4. Robert Paul Leitao said:
    Supply chain constraints and transportation bottlenecks are likely to continue well into 2022 and, in some cases, may not be resolved until 2023. Apple is well known for its supply chain mastery and willingness to invest with suppliers to ensure adequate component supplies. There’s an opportunity for Apple to gain revenue share in its primary product markets simply by being Apple and having its attractive products available when consumers are in need of new devices. We will see evidence of Apple’s superior supply chain mastery as soon as this holiday season. I’m bullish. This is a seemingly “intangible asset” that may become a “real asset” very soon.

    1
    October 17, 2021

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