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Two days ago, I wrote that Apple at $580 was Christmas in April. Others must have agreed and the stock resumed its $620 range. Today, the stock dropped again to the $580s on worries of Qualcomm’s 28nm chip shortage. For long-term investors, again, this represents a buying opportunity.
First, Qualcomm cannot produce enough 28nm chips to meet strong demand. Please reread this. Demand is strong. People want the chips for advanced smartphones because some speculate that there really isn’t any competitive product that can displace Qualcomm. Given Apple’s history of strong gross margins, it is reasonable to assume that Apple employs good business practices and has pre-ordered and negotiated pricing for the components to meet anticipated demand for any new product launch. So, if Qualcomm cannot meet demand, it seems reasonable that lesser customers will suffer a shortfall first, and should Qualcomm scramble to do whatever it can to meet demand, Qualcomm’s margins will suffer.
Second, should Qualcomm’s chip shortage result in fewer new iPhones for sale, customers will simply wait for the product to become available. This has been evidenced in every Apple product launch to date with long lines and customers willingness to wait for the product that they want. Thus, the worst outcome for Apple is that revenues get pushed out until demand can be met. We have seen this on several occasions in Apple’s history, and it hasn’t slowed the stock price march from $19 to $600.
There are happy problems and bad problems to watch out for in a stock. Outsized demand in a market with very loyal customers who are willing to wait falls in the category of happy problems. Long-term Apple investors will want to take a shot here if they missed the buying opportunity on Tuesday. Supply constraints can translate into short-term stock volatility; however, the long-term fundamentals remain in tact.
I repeat: Apple continues to have a very attractive valuation, more attractive today even than last week. Excluding cash, Apple is trading at 9.4x FY13 earnings estimates of $50.64. This is an incredibly attractive valuation for a company that is growing in excess of 50% for the past two fiscal years and last fiscal quarter. And, please note that over the past six months, the earnings estimates for FY13 have gone up by 56%. On October 4, 2011, the FY13 estimate was $32.74 and today it is $50.64. Moreover, some analysts were pegging the price target of Apple to be over $1,000 last week when it was trading at $640. Isn’t more attractive now at $588?
