Technology Investing for Beginners – You can’t Lose Money with Apple Math

I got this piece of “Apple Hot News” in my inbox yesterday: “Apple today announced that pre-orders of its iPhone 5 topped two million in just 24 hours, more than double the previous record of one million held by iPhone 4S. Demand for iPhone 5 exceeds the initial supply, and while the majority of pre-orders will be delivered to customers on September 21, many are scheduled to be delivered in October.”

What’s the profit margin on 2 million iPhones? Apple doesn’t reveal profit margins, but Reuters got hold of a document filed in Apple’s patent battle against Samsung.

According to this document, Apple’s gross margin for U.S. iPhone sales between April 2010 and March 2012 ranged from 49 – 58%. The iPhone 5 sells for $199 – $399 (depending on built in storage).

Let’s calculate a 58% profit margin on 2 million iPhones sold for $299. The result is $347 million. Since last Thursday’s unveiling of the new iPhone 5, Apple (AAPL) shares have risen 3.5%. This means that Apple’s market cap increased by some $24 billion.

A $24 billion increase based on the news of 2 million pre-orders worth about $347 in gross profit doesn’t make sense.

In fact, common sense and seasonality suggests that Apple is soon due for a reality check (a. k. a. lower prices). Since Apple is the MVP of the technology sector, it’s likely that the Nasdaq QQQ ETF (QQQ) and SPDR Technology ETF (XLK) will follow Apple’s direction.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

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5 comments on “Technology Investing for Beginners – You can’t Lose Money with Apple Math

  1. Gordon Erlebacher says:

    Hi Simon,

    I could not agree more, which is why I have been out of Apple. But given the fact that when SPY goes down 1%, the media talks about a market rout or market crash (after some annoucement from the ECB for example, which is nothing of the sort, what exactly do you mean by a reality check? -10% is nothing unsual for Apple, so that would not count. 20-30% decrease would count as a reality check. What do you think? Any guesses? And again, over what time frame? How would you gauge when this reality is happening?

    Gordon

  2. TT says:

    Simon, I agree also. The disturbing thought is that the VIX has not been rising. It is showing no fear in this Market and keeps drifting lower. Forget about 20, when do you think we might see 17 on the $VIX.X again. 🙂 TT

  3. TT says:

    Simon, Looks to me like TLT is below support and wants to fall farther. I know the FED has turned the world upside down, but usually TLT down means SPY rising. Time to buy TLT or SPY?

  4. TLT – I’ve been stewing about the SPY/TLT conundrum for a while and I don’t see a high probability set up. The week after options expiration (Friday) is notoriously week from a seasonal perspective. There weren’t any divergences at the Friday’s high so I’m sure we’ll see new highs. The question is when? The TLT chart looks a bit more bearish to me than the actual 30-year futures chart. An important level of support has still held in the futures.

    Gordon – Based on seasonality the initial reality check could be minor (5 – 10%) followed by a bigger reality check next year.

    As a side note, bullish investors polled by Investors Intelligence have soared to 54.2%.

  5. TT says:

    Simon, As of this moment, TLT up .39% and SPY up .36%. I agree that TLT chart looks Bearish.

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