New Trade: We're Covering to Close our AAPL Short Position
Today we are fully exiting (covering to close) our Apple (AAPL) short position. Here are the details with commentary to follow:
Covering to close (fully exit) short AAPL position at market price
On its latest quarterly earnings call, Apple reported overall sales down 4% year-on-year and iPhone sales down 10% year-on-year.
But management also authorized a $110 billion share buyback — in dollar terms, the largest share buyback in corporate history.
Investors cheered the size of the buyback, and also cheered the fact that Apple's sales in China, while down 8% year-on-year, had declined less than expected.
The buyback and the less-bad-than-feared China news were enough to create a 6% pop in AAPL shares.
In shorting Apple, our basic thesis was that a growth stock valuation multiple of nearly 30 times earnings made no sense for a gigantic company that is no longer growing... with its main line of business in a mature market (smartphones) where upgrade cycles are getting longer (people holding onto their old phones)... with significant geopolitical risk via China exposure (Apple's third-largest market by region and its core manufacturing hub).
All of those factors still apply, and the latest quarterly earnings report bears them out.
The optimism around Apple seems based on the notion things are going bad at a slower pace than feared (which is true) and the fact that Apple has a big pile of cash to burn on buybacks (again true).
In our view the $110 billion share buyback is a sign of weakness rather than strength: It demonstrates the fact Apple has nothing better to do with the cash.
It also shows the degree to which Apple's new market efforts, in areas like electric vehicles and health care, have fallen flat or gone bust.
The jury is out on virtual reality headsets, but Vision Pro sales have also been a disappointment. Apple's strategy with the Vision Pro seems less about revenues or profits today and more about the long game of establishing a technology beachhead early... creating an environment for virtual reality developers to build in... and then seeking a dominance payoff many years down the road.
Put all that together with growing geopolitical risk out of China, rising competition from China's homegrown smartphone champions, and the challenge of getting customers to upgrade when the rate of improvement on new smartphones has slowed dramatically — a feature of mature markets — and it makes sense to see Apple, though truly a great company, as one whose valuation should be closer to 15 to 20 times earnings than 15 to 30 times.
And yet, with all that said, investors are still ready and willing to pay 25x to 30x stock multiples for a company that isn't growing, with few good uses for its cash, where risk of further revenue and profit decline is high.
Rather than wrestle entrenched optimistic sentiment as AAPL goes back into rangebound chop mode, we're closing the short position to free up room in the portfolio for other opportunities.
Until next time,
Justice Clark Litle Chief Research Officer, TradeSmith
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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