February 6, 2017

Skeptical of Apple growth prospects but reducing short position

I have reduced my Apple ( AAPL) short to small (for a loss) after the release of earnings.

First-quarter sales and profits were not as weak as feared by some. ASP's rose slightly and the iPhone shipments beat, as did the mix of product, leading to a 5% iPhone sales beat.

Apple reported a stronger-than-expected quarter but the forward guidance was weaker than expected.

On the later point, second-quarter sales guidance was 2.5% under consensus and earnings guidance was nearly 6% below general expectations.

Apple's 2017 estimated earnings per share look to be below the 2015 peak (part of my bearish thesis), but investors clearly are willing to look toward the next iPhone introduction and for a hockey stick to EPS growth in 2018.

As this year's Wall Street EPS forecasts for the company have not changed, the company's valuation consistently has been upgraded over the last six months -- something I had not expected given the maturation of the smart phone business and the arguably non-differentiated (and expensive) Apple offerings.

I remain skeptical of Apple's secular growth prospects.

But, price discipline trumps conviction, so I decided to reduce my short position.

Position: Short AAPL small.