Every single time the Apple iPhone is revised, refreshed or upgraded the wave of teasers comes crashing down upon us once more.
Not that we’re complaining, mind you — this is, after all, the path we’ve chosen: They tease, we de-tease … if they stop, we stop. And frankly, we don’t have anything better to do at the moment … so I hope they’ll keep it up. I expect we have little to fear on that front.
There are some reliable pitches that come around every few months when there’s big mobile news — the Motley Fool’s persistent teasing of American Tower as a play on growing mobile data demand has been nonstop (and a successful pick), and there have been a handful of folks who tease Corning (GLW) every few months as a play on the increasing volume of gorilla glass-featuring tablets and smart phones. I don’t write about those pitches every single time they’re rehashed — even your friendly neighborhood Gumshoe gets a bit bored with enough repetition — but this time around we’ve got a new stock being teased as an ancillary play that should see great stock performance (immediately, we infer) following the introduction of the iPhone 5.
Which, in case you didn’t notice, is happening tomorrow.
And they’re probably right … Apple tends to keep things very hush-hush, and there’s always a little surprise or “one more thing” lurking in there somewhere, but Apple has announced an event that has to do with the number five and that will happen tomorrow, so presumably the iPhone 5, with its larger screen and faster processor and LTE chip for faster data and whatever other tidbits they throw in, will be unveiled for the hungry masses and will be on sale within a matter of days or weeks after the announcement.
Ian Wyatt quotes analysts as projecting 80 million iPhone 5 sales being “in the bag,” which would certainly be good for both Apple and it’s suppliers … but he’s not actually touting a supplier this time around, he’s touting another service provider of some sort, and not a tower company, that helps to speed the massive flow of data to these iPhones.
Because that’s really been the story of the “smartphone revolution” — no one actually talks on their phone anymore, they text and use the web and use incredibly data-hungry web-enabled services like Apple’s voice-activated Siri assistant, which is why those early iPhones crashed the AT&T networks in NYC in past years and why networks are trying to gradually cut down on the “unlimited” data plans even as they continue to build out the next-generation “4G” LTE networks that provide a much faster data interchange and web browsing experience for mobile devices.
Here’s how Wyatt gets us excited in the ad, trying to get us to sign up for his Top Stock Insights newsletter:
“One Stock You Must Buy Before Apple’s HUGE Announcement Wednesday, September 12thAre you getting our free Daily Update
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“Now is the perfect time to invest in this highly profitable company Fortune magazine calls a ‘supercharged performer’ and one of the fastest growing operations in the world –
“BEFORE the all-new iPhone 5 hits the shelves… and sends its shares even higher!”
And then he tells us that the iPhone releases specifically do bring better short-term stock performance for this secret stock:
“Outperforming Apple and CRUSHING The Market!
“Almost every year… like clockwork… this stock takes off when Apple-crazed consumers start buying up the latest version of the iPhone. Have a look:
- Up 79% in 9 months after the iPhone 3GS went on sale June 19, 2009.
- Up 95% in 5 months after the iPhone 4 launched June 24, 2010.
- Up 39% in 3 months after the iPhone 4S was released October 7, 2011.”
And he shows a chart of the big outperformance of this stock — since early 2008 the stock is up about 350%, while AAPL is up more like 250-300% over that time. I would only note that the chart move obscures the fact that for the last two years, AAPL has done far better than this secret stock — thanks largely to the fact that the unnamed stock has had huge spikes up and down and is currently down dramatically from recent highs.
And here’s his take on the big increase in data caused by iPhone usage:
“iPhones need fast, limitless access to data… available 24/7… and streamed from cell towers and buildings all over the world.
That may not sound like a big deal…
“But if you’ve ever received a shockingly large cell phone bill after watching streaming video or excessively browsing the web… you’ll know data doesn’t come cheap.
“It’s the most expensive part of your bill!
“And nobody knows that more than iPhone owners. Because they consume more data than anyone else.
“iPhone users are the world’s data hogs
“They make up a whopping 80 percent of world’s heaviest data users, according to tech research firm Analysys Mason.
“In fact, last year alone… thanks in part to the release of Apple’s most data-hungry smartphone the iPhone 4S… worldwide mobile data usage DOUBLED!
“And what’s even more astounding is that the amount of mobile Internet traffic in 2011 was greater than all prior years combined!
“And this is just the beginning… According to future projections, mobile and iPhone data usage is set to nearly double EVERY YEAR for the next 3 years!”
And then we get into some specific clues about exactly which “secret” company Wyatt is pitching to benefit from tomorrow’s release:
“… all this skyrocketing data usage means windfall profits for this one company…
“You see, it’s this company that provides all the data iPhone owners need. It owns “virtual pipelines” of data that run to iPhones and allow them to use apps and access the Internet at lightning fast speeds from anywhere, anytime.
“If that sounds complicated… it is. No ordinary company could be tasked with such a vital role.
“In fact, this company’s technology is so important… it’s worked hand-in-hand with Apple for years to develop essential software for the iPhone, iPad, and iPod Touch — ensuring they have the fastest and most reliable mobile Internet access….
“… it doesn’t own a single cell tower…
“Its technology is pure code… Much like how Google’s huge competitive advantage is hidden deep with in its search algorithms… same goes for this company.
“It can expand networks and increase mobile Internet speeds, instantly, without erecting a single cell tower.
“In fact, this high-tech firm is so ahead of the curve… it just beat out Cisco — the $200 billion networking pioneer — to secure lucrative contracts… practically guaranteeing it years and years of business!”
OK, so it sounds like this is one of the “internet speeder upper” stocks — some sort of network technology or data compression technology to make stuff move faster. Which one, specifically?
Well, to answer that one we need a few more clues:
- “Analysts expect annual revenues to jump 20% to $1.39 billion in 2012 and to $1.6 billion in 2013.
- Earnings per share (EPS) is expected to rise from $3.44 to $4.44 for 2012 and $5.19 in 2013.
- And, in addition to Apple, it has thousands of customers including tech heavyweights — IBM, Dell, Microsoft, and Oracle – all paying millions for its essential technology.
“Plus right now it’s trading at just 22.5 times current year earnings… and only 19 times forward year earnings — nearly the lowest multiple in a year!”
So which stock is Wyatt pitching? Thinkolator sez this is: F5 Networks (FFIV)
F5 is indeed, at least in part, a “speeder upper” networking company — not unlike Limelight Networks (LLNW) or Akamai (AKAM) or Acme Packet (APKT) or any of a host of others, their primary mission is to move data more quickly from point A to point B. They all use different ways of doing so, whether it’s actually faster pipes or more distributed data or better data compression to make each file smaller, there are lots of ways that folks try to speed things up — but it’s all about speed and secure transmission. As you can probably imagine if you ever abandoned your virtual shopping cart because the site was moving to slow, or gave up on a link after it failed to load for you within three seconds, we all want faster, faster, faster everything, all the time, and there’s a huge amount of money at stake in fostering faster transactions or faster downloads or faster viewing of impossibly cute cat videos.
So … why is F5 our match? Well, they are indeed expected to post $1.6 billion in 2013 and $1.39 billion this year for their top line number — though it’s actually now $1.38 billion (one analyst cut forecasts over the last month), and their 2012 fiscal year ends in about three weeks so most of that $1.38 billion has already been made.
And they are expected to finish the year with $3.44 in earnings per share, with analysts forecasting $4.44 in earnings for the year that starts on October 1. Analysts are also projecting average annual earnings growth of about 17.5% for the next five years, so the projection of $5.19 for 2014 (that’s been lowered to $5.16 now, actually) is reasonable if very unlikely to be accurate (I can’t even predict how much I’ll earn in 2014, and I know myself pretty intimately) — but, to be fair, analysts have been spot-on with this one for 2012 so far, FFIV has beaten the estimates by just a few percent in most quarters recently, and hit the number exactly in the last quarter.
So the PE numbers have changed a bit but are still a close match for the tease. Right now you’re paying about 27X current year earnings (or last twelve months earnings, both numbers are about the same), and about 21X anticipated earnings for the year that’s about to begin (that mus be what Wyatt means by “current year”) … or about 19X fiscal 2014 earnings, which is really the “forward” year that starts in October 2013.
Which is a lot. But most of the competitors are highly valued as well, other than giant Cisco, so it doesn’t stand out much — and in FFIV’s case, the high valuation is partly in recognition of the tremendous earnings growth they’ve posted over the last four or five years. I don’t know much about their business, but this is the snapshot quote from Morningstar:
“During the last five years, F5 Networks’ differentiated approach to network traffic management has allowed it to steadily gain share from much larger rival Cisco Systems CSCO in the rapidly growing application delivery controller (ADC) market. We think F5’s technological lead and the proven value of its products to customers positions the company for ongoing success for years to come, despite increasing competition over time.”
Morningstar’s analyst says they’ve got the “best in class” technology in their particular niche of application delivery controllers, but, no surprise for the usually value-focused analysts there, they think it’s trading awfully close to fair value already. There is plenty of competition, not only from Cisco (which has enough cash on its balance sheet to buy out FFIV at a 100% premium today without even sweating) but from other hardware-focused companies in the switch-and-router end of the network management business like Citrix, Riverbed or Juniper.
Did that paragraph make it sound like I know what I’m talking about? If so, I apologize — that’s misleading. I know that the demand is high for higher speed equipment and technologies, and that the pressure continues to increase as each company’s breakthroughs become part of the basic commoditized technology ever more quickly, but I don’t really know F5’s business much at all. From my very quick look at the company, which was a beaten down shell of its current self several years ago when I last looked at them in any detail, my main concern would be that with such good margins (20% profit margins, 30% operating margins), big competitors like Cisco must be desperately trying to beat their designs.
And yes, FFIV has worked with Apple on making sure their technology works with Apple’s products — but from what I can tell they do that with most of the hardware manufacturers. There is an F5/Apple partnership that’s explained in this brochure, so there is at least something special to the connection but it seems like it’s largely a corporate solution for integrating remote access into i-devices using F5 apps.
When it comes to the performance of FFIV stock, I don’t know if it’s really possible to make any predictions from those past performances in the wake of other iPhone releases — Wyatt uses different time frames after each launch, but in general the stock has tracked along with many other tech stocks in the wake of the iPhone releases, I haven’t spent that much time scouring through their past results but there are many other stocks that have had similar good performance over those noted time periods. Not as good or dramatic in each case, since FFIV has definitely been a much stronger company than most over the past five years, but relatively similar.
FFIV is a company that is doing very well, is loved by investors, and has put together really solid earnings growth for years in a growing sector — but if you’re going to predict that they’re going to spike tomorrow or over the next three months specifically because of the iPhone launch, well, your crystal ball is better than mine. They’re a fast growing company that’s expected to keep growing fast, and they’re priced as if investors expect them to keep growing earnings at a mid-teens rate for many years into the future — if they can do better than that, or become more consistent, the stock should rise, if they miss a quarter, with this valuation, the stock will fall.
If I want to benefit from a spike in iPhone sales, I’m still a bit of a fuddy-duddy — I’d rather do so by buying Apple, which handily beats FFIV when it comes to trailing growth, projected growth, valuation, cash, and dividend yield (FFIV doesn’t pay a dividend). But while I own Apple, I don’t have much interest in trying to trade my shares around product or earnings release dates — I plan, until evidence tells me to do otherwise, to just sit back and watch a spectacular, inexpensive company keep growing. That’s not to say there’s anything wrong with FFIV or any of the other companies that might get an ancillary boost from the increasing mobile data flow or from iPhone sales, or might even do better than Apple as a result … but so far, not many (none that I can think of) have beaten Apple when it comes to profiting from Apple’s products. Sometimes the easiest way to benefit from a hugely successful company is just by buying shares of that hugely successful company, we don’t always have to make it more complicated.
But it’s your money, so what do you think? Ready to ride the iPhone 5 wave to profits in FFIV, AAPL, GLW or any of the many other suppliers or potential beneficiaries? What’s your favorite? Let us know with a comment below.
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