Why Apple Jumped $31 Today

After lagging for weeks, Apple (Nasdaq: AAPL  ) sure enjoyed a nice day today. Shares traded as high as $561.54, a gain of more than $31 from Friday's close. They closed within cents of that high. On a percentage basis, that outperformed the broader market by several points.

Let's look what's giving Apple bulls courage today.

Pay no attention to this Fool
As much as I'd like to think that my words can move a $500 billion company that trades an average of 24 million shares a day, I doubt that my article over the weekend about how absurdly cheap Apple has become over the past few weeks is the cause.

While Apple's depressed prices and low valuation relative to its earnings power and the broader market may mean shares are locked and loaded, there still needs to be a catalyst for a spark of inspiration.

Good old Gene
Longtime Apple analyst and bull Gene Munster of Piper Jaffray is out with a research note to dispel fears that supply constraints at baseband provider Qualcomm (Nasdaq: QCOM  ) may hurt the iPhone maker in any meaningful way. The wireless chip specialist's 28-nanometer baseband chips are widely expected to be a key ingredient in this year's iPhone to serve up 4G LTE speeds. Apple uses a different flavor baseband modem from Qualcomm in the third-generation iPad to facilitate 4G LTE.

While Qualcomm is seeing some 28-nanometer supply constraints from contract manufacturer Taiwan Semiconductor Manufacturing, Munster is confident that Apple will be able to lock down the supply that it needs (as usual) and gets "favorable treatment in terms of access to 28-nanometer inventory." Apple is no stranger to having certain scarce components cause manufacturing bottlenecks, such as the Retina Display in the new iPad.

The company has experience managing launches and ramping up production as quickly as possible, so Apple should be relatively insulated from the impact of any shortages that Qualcomm is facing. Munster also believes that even if Apple is faced with shortages, prospective buyers would simply delay purchases instead of defecting to a competing smartphone and those sales would be booked in the following quarter, especially since this year's iPhone will probably be the most meaningful upgrade in years. He added, "We believe the iPhone 5 will represent the biggest consumer electronics product launch of 2012 as well as the biggest device upgrade cycle in smartphone history."

Munster is modeling for 49 million iPhone unit sales in the calendar fourth quarter, and he thinks there's an 80% shot that Apple will hit his target. He also went ahead and reiterated his "overweight" rating and $910 price target, representing 72% upside from Friday's close.

Good old Goldman
Another concern that's been weighing on shareholders is that wireless carriers are simply fed up with forking over juicy subsidies, with margins going out the door along with them. That's one reason Apple's original iPhone partner, AT&T (NYSE: T  ) , is shifting its marketing weight to promote Nokia's new Lumia 900 as its new exclusive flagship phone.

Goldman Sachs analysts are questioning this fear, saying that carriers are unlikely to make "material changes to retail prices for leading smartphones," considering their focus on growing smartphone subscribers. Analyst Bill Shope wrote, "We continue to believe that reductions in smartphone subsidies are unlikely to significantly impact the Apple model or the longer-term value of the platform."

Even as carriers are creating disincentives to upgrade, such as fees or extended upgrade timeframes, Shope actually sees this trend as benefiting Apple. After all, if consumers are looking at a fixed upgrade fee and they know they'll be using that device for a longer period of time, why not go with the best in breed?

I've always looked at basic game theory as the reason carriers have little to no choice but to pay up, especially now that the three largest carriers offer the iPhone. One carrier can't revolt because it would just send all those iPhone customers to a competing carrier, a risky bet that none is probably willing to make.

Even if AT&T and Verizon (NYSE: VZ  ) were to collude and mutiny, Sprint Nextel (NYSE: S  ) has already made it perfectly clear that it will do whatever it takes to offer the iPhone. That would render a joint threat from Ma Bell and Big Red less effective, especially as AT&T knows firsthand how powerful an exclusive grip on the iPhone can be.

Back to Apple
Facebook
's historic IPO is now in the rearview mirror, and some had speculated that investors were rotating dollars out of Apple last week to invest in the social networker. Facebook shares got crushed today, as the offering has mostly fizzled out amid its lofty valuation.

Looks like those Facebook dollars are coming right back to Apple.

There are plenty of reasons you should buy Apple, and our senior technology analyst has put it all together for your reading pleasure in one in-depth report that's just been released. You'll also get free quarterly updates to keep you up to speed. Do yourself a favor and grab a copy while you still can.

Fool contributor Evan Niu owns shares of Verizon Communications, Apple, and AT&T, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Qualcomm and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Goldman Sachs Group and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2012, at 11:06 PM, dsachdev wrote:

    I think that this article fails, because there is no mention of options expiration in here - that coupled with the "Sell in May and Go Away" plus the timing of the Apple earnings and test of much lower levels prior to that have to be factored into why we are finally moving back up.

    The answer given here seems to be for the non-savvy investor.

  • Report this Comment On May 21, 2012, at 11:10 PM, TMFNewCow wrote:

    dsachdev,

    I'm assuming you buy into the theory that the options market manipulates underlying stock prices?

    -- Evan

  • Report this Comment On May 21, 2012, at 11:21 PM, MrSmith210 wrote:

    This article mentioned 3 key topics, granted none of which involved options. But as an options trader, you are surely aware that the options crowd is much smaller in terms of traders, so therefore it's value on the article is less important than those actually discussed.

    I personally think the 100 day moving average from a technical standpoint outweighs the options argument, and that wasn't mentioned either. Take a look at the AAPL chart. It's glaring and obvious also, why the stock bounced here. Of course not to mention it's fundamentals along with the more recent arguments mentioned here.

    All in all, decent article. Very simple and quick info for someone that maybe missed the market's action today for a quick recap on AAPL's big day. Not fully in depth and more arguments can be made.

    The article is potentially "for" the "non-savvy" investor. But that's not to say the author wasn't aware of both of our other notable issues that may have also contributed to the pop.

  • Report this Comment On May 21, 2012, at 11:31 PM, Jewels100k wrote:

    TMFNewCow...I do give you credit, thanks to your factually convincing article: "How Is Apple So Cheap?" for keeping me focused and stead-fast for Monday!

    Based on my research I knew it was time for a bullish play for the coming week. So I bought 1 contract- the $525 strike for $14.05 on Friday 18 May. I theorized Apple would go to $550. Over the weekend I started to doubt slightly.

    Sunday evening I came across your article and I felt more confident in my decision.

    I needed the price for profits to be over $539.05

    Monday I sold the call a little after 12 noon when the $525 call hit $25.40 premium (around $550)

    A great return of $1,135. for my $1,405. play! Then I kicked myself for selling early as I watched Apple hit $561. WOW!

    I'm in constant research mode and am now excited to read more of your detailed observations to keep me on track! Thank you !

  • Report this Comment On May 21, 2012, at 11:50 PM, dsachdev wrote:

    I will agree that there are some decent points made here, but I think options expiration has a lot to do with the timing of when AAPL and the market rallied. Options traders generally trade stock as well, and they use the two in conjunction with one another. This includes the big boys that control all the money!

  • Report this Comment On May 22, 2012, at 12:07 AM, Dowj15k wrote:

    You folks all make cogent points, but why no mention of a short squeeze? After all, the stock has been pummeled since a couple days following it's glowing earnings report. I have to think there was plenty of shorting against the box, naked shorts, and some put buying. All of which, combined with the aforementioned, surely helped propel the stock today. But with only about a half a day of short interest, and Europe a cesspool of stink, how much longer can Apple rally? Another day or two?

    I don't think the stock is in for any significant run up. I do think that those who failed to sell on the post earnings decent will sell into any meaningful rally.

  • Report this Comment On May 22, 2012, at 8:19 AM, lojikfool wrote:

    hush, most options traders are gamblers and most chartists are deluded, please keep the long term fundamentals in mind people.

  • Report this Comment On May 22, 2012, at 9:27 AM, TMFNewCow wrote:

    Fools,

    A couple of things. Options expiration doesn't affect the stock price. Within the options market, you'd have to suspect one of two parties to be manipulating stock prices: market makers or traders. Market makers *do not care* very much what happens to the stock price, this is because they delta hedge their directional risk when taking option positions and simply look to profit from the spread (which is why the spread can be large for thinly traded contracts). Their job is to provide liquidity, and in order to do that without taking huge risk, they hedge. They don't care (much). Options traders aren't gonna be it either, most options positions are relatively smaller than stock positions due to the inherent leverage, so it makes no sense to attempt to sway the market considering the sheer amount of capital that would require, particularly considering the size of the options position.

    The possibility that there was some short squeezing is definitely warranted. I don't doubt that the recent downtrend was partially attributed to short positions. Shorting against the box isn't more significant (trader simply owns the share they are shorting), naked shorting is rare (brokers get hit with Regulation SHO if they don't settle properly), and we've already discussed options.

    -- Evan

  • Report this Comment On May 22, 2012, at 9:32 AM, visard wrote:

    I'm puzzled why apple has suddenly become a favorite with MF. 6-8 years ago, when I was buying for $60 - $90 MF thought the stock was hardly worth mentioning.

  • Report this Comment On May 22, 2012, at 11:55 AM, setht23 wrote:

    @visard

    Do you think that the MF is a single entity? The MF staff are a group of investors who have different view points, values, and investing strategies who provide us with their personal insight and information. They disagree with each other sometimes completely contradicting each other in competing articles. Things change and their opinions of companies change too. All in all they're people, not omniscient beings.

    If you follow their advice as gospel you will fail. Treat these articles as a starting point to do more research or just general knowledge to add to your mental library. Criticizing these people because they can't predict the future is obnoxious.

  • Report this Comment On May 22, 2012, at 1:00 PM, TMFNewCow wrote:

    Well put, setht23. Also, for more info always feel free to see the link provided at the bottom of every single article in the disclosure (the whole part about "We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.")

    http://wiki.fool.com/Motley

    -- Evan

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