J.W. Jones:Â My last missive dealt with a simple trading plan for XOM using the straightforward easily managed and easily understood strategy of selling naked puts and either allowing assignment of the stock and entering a covered call campaign or closing the position after Read more…
Apple (AAPL) is an unusual stock for several reasons, not the least of which is the strong retail demand for the stock and a large contingent of customer-zealots who regularly worship at the altar of Steve Jobs.
Throw together the factors mentioned above, Appleâ€™s history of important product announcements at major events and the return of Jobs and his unique talent for unveiling new cutting edge products and you get an interesting confluence of events â€“ and expectations â€“ at Mondayâ€™s Apple Worldwide Developers Conference.
These conferences are always abuzz with rumors and speculation about the next big thing that Apple is going to announce which will once again change the technology landscape. When is the next iPad coming? What new features will it include? When will the iPhone 5 be out? What will the next iOS and Mac OS operating systems do? What will be the implications for the devices they run? What is the iCloud and what does it mean?
In the end, those hoping for groundbreaking new products were disappointed. The iPad, iPhone, iPod, MacBook, iMac, Mac Pro, AppleTV, etc. were not on stage. Instead, the hardware devotees had to settle for innovations which were confined to operating systems enhancements and the iCloud â€“ stuff you canâ€™t wait in line for at an Apple store, take home and dazzle your friends and family with.
The irony is that the obsession with hardware misses the big point. New products are critical to Appleâ€™s business, but at best it gets them a first mover advantage that is not guaranteed to endure. The truth is that from a strategic perspective the iCloud is much more important to Appleâ€™s future than any new product, because the iCloud is a platform play that enhances the value of the full range of Apple products and services, including future products and services.
Let me illustrate this with a personal example. I have about a quarter of a century of PC-based computer experience. I probably owned two dozen laptops before I bought my first iPhone. When the iPad 2 came out, however, it was easy for me to expand my stable of Apple products. Now that I am habituated to iTunes and the App Store, it is easier for me to contemplate something like the MacBook. With all of these devices seamlessly sharing data in the background on the iCloud, the data argument for expanding my suite of Apple products becomes that much more compelling. It is a similar story for my wife, who only recently began playing with her first Apple product, the iPad. She has been so completely won over that an iPod will soon follow and then Iâ€™m betting an iPhone will be too difficult to ignore. By the time she gets around to replacing her laptop, Iâ€™m fairly sure the MacBook Air will win her over â€“ even if she doesnâ€™t even know what it is right now.
I suspect that something similar is in the process of happening across the globe. Many of us who have spent the majority of our careers in a PC-centric corporate environment have often found Apple products to be too much of a compatibility issue to be worth the trouble. They have been relegated to toy status rather than our central computing devices. The iCloud gives Apple a chance to convert those PC cling-ons not only to exciting Apple products and services, but to a iCloud data world that could be a platform revolution. Device-independent data sharing is just around the corner and Microsoft (MSFT), Google (GOOG) and their ilk better have a strong alternative â€“ and soon.
As for AAPL stock, it is down about 3% since Steve Jobs took the stage on Monday. Savvy investors should be thinking more about Brian Arthurâ€™s Increasing Returns and the New World of Business and less about the timing of new product announcements.
Disclosure(s): long AAPL at time of writing
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Apple Products vs. Platform
Technology giants, Apple Inc. (AAPL) and International Business Machines (IBM) reported stellar quarterly earnings, smashing analyst expectations and shinning a ray of light on the technology sector and the exchange traded funds (ETFs) that track it.
Apple reported a fourth quarter increase in revenue to $26.7 billion, while boasting gross margins of 38.5 percent and net income of $6 billion, or $6.43 per share, beating Appleâ€™s own forecasts of revenues of $23 billion and a gross margin of 36 percent.Â Furthermore, these numbers crushed the $3.38 billion in net income that the Cupertino, California-based company boasted for the same period the previous year.Â This jump in revenue was primarily driven by increased consumer spending and hence better than expected sales, which included 16.24 million iPhones, 7.33 million iPads, 4.13 million Macs and 19 million iPods.Â Analysts were expecting sales in the realm of 15.5 million iPhones, 6.2 million iPads, 4.2 million Macs and 19 million iPods.Â
A similar tune was sung at IBM as the company reported fourth quarter revenue and profits ahead of estimates.Â Revenue at the IT products and services company rose 7 percent year over year to $29 billion and profits jumped to $5.3 billion, an increase of nearly 16 percent from a year earlier.Â IBMâ€™s performance was primarily driven by an 18 percent increase in signings of services contracts, which was worth around $22.1 billion during the quarter and increased business demand for computer hardware, as sales of the companyâ€™s System Z mainframe computers rose 69 percent in the quarter.Â
As for the future of these two companies, some are worried that the medical leave of Appleâ€™s Steve Jobs could hurt future performance; however the new partnership between Apple and Verizon Communications (VZ) and Vodafone Group (VOD) should bolster future demand for iPhones and Appleâ€™s vertical integration and strategic and structural advantages which have enabled the innovative company to build a competitive advantage is likely to position the company well in the near future.Â
IBMâ€™s future remains rosy as businesses start to upgrade IT systems and loosen the grip they had on their wallets.Â IBM increased signing of new outsourcing contracts in the latest period and boasts a backlog of service deals worth an estimated $142 billion.Â As a result, IBM sees annual earnings for the year to be â€œat leastâ€ $12.56 a share and in the same ball park as analyst expectations.Â
Some diversified ways to play Apple and IBM include:
- Internet Architecture HOLDRs (IAH), which allocates nearly 33.82% of its assets to IBM and 23.21% to Apple
- iShares Dow Jones US Technology (IYW), which allocates nearly 13.79% of its assets to Apple and 8.04% to IBM
- Technology Select Sector SPDR (XLK), which allocates nearly 12.29% of its assets to Apple and 7.17% to IBM
- Vanguard Information Technology ETF (VGT), which allocates 10.8% of its assets to Apple and 7.19% to IBM.
Disclosure: No Positions
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Four ETFs Driven By Apple and IBMâ€™s Stellar Performance
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Chip bellwether, Intel Inc. (INTC), recently reported a quarterly profit of $3.39 billion, up nearly 48.7 percent from a year earlier, giving further confidence that the economy is improving and shinning a ray of light on exchange traded funds (ETFs) that track the semiconductor industry.
This profit of $0.59 per share came despite weaknesses seen in the consumer personal computer world and was primarily driven by increased business server demand, which aided in pushing revenues up to $11.46 billion.Â This indicates that businesses are starting to loosen the grip on their wallets and make the purchases that were once put on the back burner in order to reduce operational costs.Â
Furthermore, Intel continues to witness healthy gross margins, as its margins increased to 67.5 percent from 64.7 percent and above analyst expectations of 66.7 percent.Â
As for the near term future of Intel, the company forecasts revenues for the current first quarter to be between $11.1 billion and $11.9 billion indicating that demand for its chips will remain elevated.Â According to Miriam Gottfried of Barronâ€™s, this revenue is expected to be driven by sales of Intelâ€™s new Sandy Bridge processor.Â
Other reasons Intel remains attractive include an expected $9 billion budget for capital expenditures during 2011, a ramp up in production of the companyâ€™s first microprocessor based on 22 nanometers and its relative cheapness. Intelâ€™s shares are trading at roughly 10 times forward earnings as compared to nearly 21 times for competitor Advanced Micro Devices (AMD).
Although some analysts are saying that it is equally important to consider changes in consumer behavior as individuals are shunning away from PCs and turning to smartphones and tablets which donâ€™t use Intel chips, like the Apple (AAPL) iPad, these changes have already started to emerge, evident in a decline in PC sales, and Intel appears to be adapting just fine.
Some ETFs that will likely be impacted by Intelâ€™s performance include:
- Semiconductors HOLDRs (SMH), which boast Intel as its second largest holding at nearly 19.1 % of all assets.
- ProShares Ultra Semiconductors (USD), which is a leveraged play on the semiconductor industry and seeks to return 200 % of the performance of the Dow Jones US Semiconductors Index for a single day.Â Intel makes up the largest equity piece of USD and allocates nearly 13.9% of its assets to Intel.
- iShares PHLX SOX Semiconductor Sector (SOXX), which allocates nearly 6.9% of its assets to Intel.
Disclosure: No Positions
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Three ETFs To Cash In On Intel
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For the second year in a row, I have elected to stick my neck out and make my best guess at what the investment world will look like in the coming year in conjunction with the Bespoke Investment Groupâ€™s second annual roundtable.
As someone who has a tendency to focus almost all of my predictive powers on the next two options expiration cycles, I find that forcing myself to think in terms of a one year time horizon is a daunting task. Still, just going through the process and committing some ideas to paper makes this exercise worthwhile and fun.
Frankly, I was surprised by how accurate many of my predictions from last year turned out to be and for better or (more likely) for worse, this has emboldened me to be even more provocative and more specific this year, including some outrageous comments about AAPL.
More to the main theme of this blog, I think readers may find the following predictions for 2011 to be of interest:
â€œ2011 will mark the rise of volatility as an asset class.
The launch of new products, rapid growth smartphones and an increase in replacement sales enabled the mobile phone sector to post second quarter growth paving the path to opportunity for the Technology Select Sector SPDR (XLK), the iShares S&P Global Technology (IXN) and the PowerShares QQQ (QQQQ).
According to research firm IDC, manufacturers of mobile handsets shipped a more than 317 million units worldwide in the second quarter of 2010, marking an increase of 15% year-over-year.Â One reason behind this demand is the increased appeal of smartphones.Â The research firm further stated that sales of smartphones, which account for nearly 19.8% of all mobile device sales, grew nearly 50% year-over-year and is expected to continue to grow.Â Drivers behind this exponential growth included an improved business environment, healthy operator subsidies, vigorous competition between vendors, and a growing tide of lower-cost models.
A second force that has supported growth is new technology and enhanced product lines which result in consumers wanting to trade-up.Â Mobile phone manufacturers continue to improve technology seeking to deliver the fastest networks and offer unique features which entice consumers.Â In fact, a major driver for replacement sales was the transition from traditional mobile phones to trouchscreen and QWERTY devices.Â
As for the future of the mobile phones, the sector is set to witness healthy growth, primarily in smartphones.Â Furthermore, this growth in smartphones will likely come from international mobile adoption and the desire for increasingly sophisticated services, like GPS and touchscreen.Â In some developing parts of the world, like Africa, mobile penetration rates far supersede those of land lines. In fact, the mobile phone penetration rate in Africa is greater than 20% compared to mere 9% for land line penetration.Â This emphasis on mobile phones in Africa is being fueled by governments in that it is far less expensive to build infrastructure for mobile phones than it is for land lines.Â As a result, many governments in Africa have made cell phone infrastructure a priority and have partnered with major cell phone carriers to facilitate the development of this infrastructure.Â
Government’s in Africa and elsewhere made the construction of adequate cell phone infrastructure a priority. In several cases they have performed partnerships with major carriers to facilitate the development of this infrastructure. While factors obstacles such as high taxes, in adequate availability of power and lack of geo-political stability may hinder growth some countries, there are numerous developing countries in which the environment is ripe for further cell phone infrastructure development.
Lastly, the anticipated launch of several refreshed operating systems is expected to further support enhanced demand for mobile phones.Â In fact Googleâ€™s (GOOG) Android operating system, which is relatively new to the new mobile phones space, has been a hit and is starting to gobble up market share.
- Technology Select Sector SPDR (XLK), which allocates 10.91% of its assets to Apple (AAPL), manufacturer of the iPhone and includes Google, AT&T (T) and Verizon in its top holdings.
- iShares S&P Global Technology (IXN), which, in addition to giving exposure to Apple, includes Samsung Electronics and Nokia (NOK) in its holdings.Â
- PowerShares QQQ (QQQQ), which allocates more than 19% of its assets to Apple and also includes Blackberry maker, Research In Motion (RIMM) in its holdings.Â
Although an opportunity seems to exist in mobile phones, investing in the aforementioned equities carry risk.Â To help protect against this risk, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important. Such a strategy can be found at www.SmartStops.net.
Disclosure: No Positions
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Three Tech ETFs To Be Boosted By Mobile Phones
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