Apple cracked $700 in early September and has now pulled back sharply. It seems to me the pullback has to do with investor concerns over a possible labor strike at Foxconn, Apple’s Chinese manufacturing facility.
Certainly, there should be concern. Conditions at Foxconn have been the subject of much controversy, and a plant-wide strike has the potential to shut down iPhone 5 production. But in the past, these things have passed. And they probably will again. More importantly, analysts I have spoken with say Apple could be prepping a huge fourth-quarter product push that many include not just one, but two new products.
The products would be a new iPad as well as the famous Apple TV everybody has been waiting for. If you don’t think that Apple is prepping something big, you need to look at this very interesting analysis published by Horace Dediu the ASYMCO Website. Dediu demonstrates the relationship between Apple’s groth in Capital Expenditures (CapEx) and revenue growth in new products. What’s interesting is that CapEx is a leading indicator because Apple budgets this ahead of the production schedule, so you can see what the company is expecting.
In some shocking graphs, Dediu shows that CapEx has exploded in the just-ended quarter, to a new high of $3 billion, which is almost double what Apple has produced in the past — just a few quarters ago. This sets the stages for a historic fourth quarter for Apple. Using historical data, Dediu attempted to project the relationship between share price and capial spending, based on what types of revenue growth has occurred in the past after CapEx jumps. According to him $1.5 billion in CapEx — achieved just a quarter ago — equates to a share price of $800. If history is any guide, Apple’s $3 billion in CapEx would correspond to a doubling of share price from there — to $1,600.
Of course past history is not guarantee of future results. As of this moment, the market believes a bigger concern are the working conditions in Foxconn. Will it be yet another grand buying opportunity for Apple? I have picked up some Apple shares in the $660 area on this weakness. That’s a nice pullback from the all-time high of $700. Apple stock is still cheap with a P/E in the 14 range and a PEG of .63, so it’s worth holding. I would no want to miss out on a possible explosion to $1,600 per share
Disclosure: Long Apple