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Bloviation Nation: Apple Edition


"Go ahead... bite the Big Apple; don't mind the maggots!"


Like much of the rest of the tape, Apple (AAPL) is running out of steam after a 5 pt ($70 - $75) ramp over the last week. In the short-term, the question is which strike price exerts the heaviest pull into expiration tomorrow, 72.50 or 75. I've got no horse in that fight. I haven't traded the name in Real Life in ages and my television persona closed out my 72.50 calls in last night's show. Having declared victory and moved on with my life (hint, hint, Mr. President) let's look at the big picture for the stock.

Apple's stock trades on momentum on emotion. You can send me an angry email disputing that assertion but doing so will only prove my point. So, let's just accept at face value my contention that AAPL has about $20 of "Steve Jobs is Magic" Kool-Aid in it, give or take a fiver. It's not a good or bad thing; it just is. What's important to a trader is the ability to anticipate the most likely direction of that enthusiasm over the next tradable period.

In light of the Apple-related news flow of the last week, the key questions thus become:

1) Are the new line of iPods going to be threatened by the new Microsoft (MSFT) Zune (named, I believe, for the somewhat obscure Greek Goddess of over-designed, late-shipping, privacy-stealing pieces of garbage)?

2) Is the fact that iTunes now enables the downloading of Disney (DIS) movies a big deal and, if so, when will it matter to Apple's top or bottom line?

3) Is Apple going to be the consumer electronics company to finally crack the code in terms of becoming the Digital Media Center for the Home (the Holy Grail of CE cos)?

Not having enough patience for a proper Socratic dialog, I'll go ahead and give the answers now:

1) No. To elaborate: No, absolutely not. Put it this way, the mere thought of Microsoft pre-loading the Zune with "25 songs and other pieces of content" is more than enough to keep me devoted to the iPod. "DJ Bill Gates" may be the only idea on Earth with less appeal than Dell's (DELL) defunct DJ Ditty iPod killer.

2) Movies might matter but they need to get tie-ins to other studios. Right now, Apple only sells Disney-related movies. The stated price points for those downloads ($14.99 for new flicks, $9.99 for older titles) undercuts Amazon (AMZN) but also represents a meaningful threat to retailers like Best Buy (BBY), Wal-Mart (WMT) and Target (TGT); not to mention the studios which rely on those retailers to push DVD's at little to no profit. The end game will likely be much like what we've seen in music; downloads won't make any money for Apple in themselves but they will help secure the hardware lead for Apple.

Either the retailers and the studios or Apple will have to give on the price-points but that fight is going to take a number of months to settle. In any event, it's not a knowable outcome to the spread-sheet set (analysts and the like) and movies won't help Apple's stock much until there are numbers attached.

All of that said, I'm a convert on movie and TV downloads. It's reasonably fast (I downloaded Good Will Hunting in 77 minutes last night), better than you'd expect as a viewing experience and convenient. Granted, not everyone is a price-insensitive gadget head who spends 14 hours a week in airplanes like I am but, still, it's an idea whose time has come. It's just not an idea that's going to make Apple much money for at least a few more quarters.

3) If Apple thought they had a product that fulfilled the decade-old promise to "merge the PC to the Home Entertainment Center" they wouldn't be waiting until next year before releasing it.

The new iPod line will likely sell quite well. That's fully expected and fully in the stock, at this point in Apple's life. The movie downloads, while likely to sport decent initial sales, aren't ready for prime time yet. Movie downloads will be dwarfed by music for the foreseeable future and the problems with studios and price points is more tricky than it may at first appear. If Apple raises the price to the equivalent of DVDs, there's no reason to download. DVD is better. If Apple doesn't raise the price they will be stuck having relations with their virtual corporate sister, Disney.

Kissing their sister might be better than nothing for Apple but it's not the kind of thing likely to drive the stock meaningfully higher; at least in the short term.

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No positions in stocks mentioned.

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