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• Market cap of Apple• Where Apple is leveraged• Apple and 2015

This week…

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General Advice & Risk Warning

Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or

advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You

can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment

objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are

for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product

Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you

decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:

• Market cap of Apple

• Where Apple is leveraged

• Apple and 2015

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Dear Readers,

2014 has been an interesting and turbulent yearin the market. We have published and deliveredto you Invast Insights on a weekly basis –expressing our views and convictions in detail andtrying to position you as an insightful andknowledgeable trader. There is a lot ofexcitement at Invast with the introduction ofDirect Market Access (DMA) contracts fordifference across various exchanges. To find outmore please visit http://www.invast.com.au/dma.

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Because of the new product offering, our focus in December will be to focus on 5 keystock themes for 2015. We will run through these in 1, 8, 15 and 22 December. Ournormal webinar which is the last Tuesday of every month will be brought forward to 16December in anticipation of the Christmas and New Year break. Our hope is to guide andeducate you before your holiday plans and when you’re back in January we will have our2015 Forecast Guide Special Report ready. This will be a larger than normal report, likeour 2014 document and will essentially focus on 1) Currency and macro 2) Commoditymarkets 3) Key global indices and 4) Global individual stocks.

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Our weekly Invast Insight reports will then resume in early February. While many otherbroking firms will disappear during the break, we here at Invast are working hard toensure your trading and investing does not go to sleep. It’s great to have a break withyour friends and family but you can rest assured that our team will be working hard tomonitor the markets and stay on top of all the key movements.

I hope you enjoy December and January’s content.

Best regards,Peter EshoChief Editor – Invast Insights

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This month’s reports will be structured as follows:

Key theme 1 - Week commencing 1 December 2015: Watch closely what happens toApple shares.Key theme 2 - Week commencing 8 December 2015: Watch closely what happens toEuropean shares.Key theme 3 – Week commencing 15 December 2015: Watch closely what happens toJapan’s Nikkei.Key theme 4 & 5 – Week commencing 22 December 2015: Key energy losers & theirlenders.

Key theme 1 - Week commencing 1 December 2015: Watch closely what happens toApple shares.

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Apple is the world’s largest company by marketcapitlisation. Last month we spoke about the statisticalsignificance that Apple shares have on the Nasdaq 100. Inour November webinar we received a lot of feedback fromtraders who were really surprised at the statistical impactthat Apple shares have on the overall market.

To put things into perspective, we need to look at Apple’s market capitalisation. Currentmarket capitlisation as of 1 December 2014 is around US$697bn. For an interestingcomparison, the team at ‘The Big Story’ ran the numbers on what this amount of moneycould buy.

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• It could buy 935m models of the iPhone 6 Plus with 16 gigabytes of storage. Thatwould be nearly enough to distribute Apple's latest gadget du jour to everyone living inNorth America and Europe. Or you could just buy 1.4bn units of the 16GB iPad Air 2,enough to give Apple's latest tablet to everyone in China.• It could pay for Thanksgiving dinner — and not just for the Americans who celebrate it.The American Farm Bureau estimates the average Thanksgiving dinner with all thefixings for 10 people will cost $49.41 this year. At that price, $700bn would cover 14.2bnThanksgiving meals. That's twice the world's population.• It could pay for the annual tuition for 15.5m students at Stanford University, SiliconValley's hub of higher education and the alma mater of many Apple engineers. Stanfordestimates its tuitions and fees will cost each student $45,201 during the current schoolyear.

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• It could pay for the average annual salary of 146,000 software engineers for the next40 years, based on the average compensation data that Apple's own engineerssubmitted to the company-tracking service Glassdoor.com. Apple's software engineerscurrently make slightly more than $119,000 annually, according to the website.• It could fill the fuel tanks of every driver in the US for the next 22 months, based onthe current average price of US$2.81 per gallon, according to the American AutomobileAssociation. The federal government estimates that the country burns through 135.5bngallons of gas annually, or about 371m gallons per day.• Running the numbers on NRL or AFL teams just doesn’t work in this example, so westick to American statistics. Apple shares could buy every team in the National FootballLeague, Major League Baseball, National Basketball Association and National HockeyLeague and still have nearly $600bn left over, based Forbes' latest estimates of thefranchise values in each of the major professional sports leagues.

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• With the remaining money, all 750 players in Major League Baseball could be paid thesame $325m, 13-year contract that the Miami Marlins just awarded Giancarlo Stanton.Even after that spending spree, there would still be about $350bn left in the kitty,plenty to build a new stadium or arena for every team in the NFL, MLB, NBA and NHL.• It could pay for the next 46 Summer Olympics, based on the estimated cost of $15bnfor staging the event in London during 2012. But the money would only be enough tocover the next 13 Winter Olympics, based on the $51bn that it took to pull off that evennine months ago in Russia.

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The above is to illustrate what US$700bn or market capitlisation actually means in thereal world. Obviously, the market is not completely stupid and the valuation is based onearnings which we discussed last month. For those that read last month’s note on Applewhen we discussed the NASDAQ, some of the data below might seem familiar but wereiterate it because it is vital to understand. Apple is currently trading on a price toearnings ratio of around 15.4x based on Bloomberg estimates of next year’s earnings.This is at a slight discount to the overall US market but in line with what typical industrialbusinesses have traded since the Second World War.

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Our grievance is not necessarily the fact that Apple trades on a market based price toearnings ratio but that its current earnings composition is very vulnerable to shocks.According to its most recent disclosure to the market, iPhone sales represented aroundUS$23.7bn of total US$42.1bn of total sales. That is a huge amount of money. Some 56%of Apple’s revenue is tied to the phone market. In comparison, iPads only representedaround US$5.3bn in sales revenue for the quarter or 12.5%. Of the markets, theAmericas represent around US$16.3bn with Europe at US$9.5bn and Greater China atonly US$5.8bn. For those hoping for Chinese growth, revenue was actually 3% lowercompared to the prior quarter and up only 1% compared to last year.

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In summary, Apple’s earnings are very heavily leverage to the mobile phone market inthe Americas and Europe. Other products like iTunes are growing but only representaround 10% of total group revenue – not enough to offset the larger threat elsewhere.The charts and tables below are taken from Apple’s October stock market release, wehave published these before and the full link is here for those who want to investigatefurther.

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Apple does have around US$155bn in cash to use at its disposal, although even if we doadjust for cash the price to earnings ratio based on the current market capitlisationcomes down from 15.4x to 12.3x which, with high levels of gearing on this adjustment,still doesn’t seem completely cheap. Again our issue is with Apple’s earningsvulnerability and exposure to two key geographies and one key product range. A 12.3xadjusted price to earnings ratio when taking out the cash and leaving it as a high gearedbusiness means Apple investors would need to wait more than 12 years for the businessto generate it’s payback return, assuming it can continue to replace its recent success.It’s possible, but not probable. Being short Apple has been a death trade over the pasttwo years but that doesn’t mean at some point, the company’s fortunes won’t turn orchange.

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Image: Apple weekly stock price chart via Invast DMA Trader platform

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We think Apple’s future direction will be a major theme in 2015. It is really hard to seehow the current market capitlisation can grow from current levels, based on the currentproduct mix and exposure to key geographical markets where its product penetration isalready very high. At some point the market will change its mind and the shift will bedriven by earnings expectations that don’t match what the market is thinking. We thinkgrowth expectations might be completely unrealistic – for example Bloomberg estimatesimply earnings growth of about 17% next year.

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Many other growth businesses could potentially achieve 17% earnings growth on theNADAQ next year. But with the huge elevation in Apple share price and the all-outexuberance, in a rising interest rate environment, we think the bet is not worth the risktrade off. Any earnings disappointment could also see a material re-rating in the multiplewhich the market is willing to pay. For example disappointment could see the marketchange its view from a 15-16x price to earnings ratio towards a 12-13x price to earningsratio for the foreseeing future, capping share price gains based on earnings growth.We’ve seen this before with Microsoft, once in a very similar dominant position likeApple, now having to justify its share price appreciation by closely scrutinised earningsreleases.

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Image: Microsoft monthly price chart via Invast DMA Trader platform

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Microsoft went through a similar experience to Apple leading into the 2000 tech boom.It took more than a decade for shares to recover from their lows, hitting new lows duringthe 2009 crisis and only recently starting to win back some market trust.

Will 2015 for Apple be similar to the fall for Microsoft? We think many smart traders areeyeing the situation closely and asking the very same question. We’ll discuss our Appletrading strategy at the upcoming webinar this month, make sure you register with detailsprovided below.

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5 Major Themes for 2015: Join the webinar to discuss these points

Invast Insights chief editor and contributing author Peter Esho will summarise hisoutlook on 5 key investment themes he believes are critical in 2015. Esho will documenthis findings based on the performance of key markets in 2014 and where he believes thebig opportunities lie next year. His presentation will focus on the following 5 themes:

Watch closely what happens to Apple shares. Watch closely what happens to European shares. Watch closely what happens to Japan’s Nikkei. Key energy losers & impact on their lenders.

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Esho is a regular contributor on CNBC, Bloomberg and host of ‘YourMoney Your Call’. His webinar will cover both the fundamental andtechnical outlook on these key themes and a basic introduction toInvast’s new DMA CFD product offering which complements MT4and other services.

This webinar is expected to fill fast. Q&A will be open straight after the presentation.Register now by visiting http://www.invast.com.au/resources/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd(AFSL 438 283). Invast staff members may from time to time purchase securities which areincluded in this or future reports. The authors of this report may or may not be holding a positionin the securities mentioned. Please note that the information contained in this report and Invast'swebsite is of a general nature only, and does not take into account your personal circumstances,financial situation or needs. You are strongly recommended to seek professional advice beforeopening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for theperson who downloaded it. You should not disseminate, distribute or copy this newsletter. Invastdoes not accept liability for any errors or omissions in the contents of this newsletter which ariseas a result of downloading this newsletter. This newsletter is provided for informational purposesand should not be construed as a solicitation or offer to buy or sell any financial product. InvastFinancial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product DisclosureStatement, and any other relevant Invast Financial Services Pty Ltd documents before youdecide whether or not to acquire any financial products listed in this email. Our FinancialServices Guide contains details of our fees and charges. All these documents are available hereon our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange areleveraged products and carry a high level of risk and you can lose more than your initial depositso you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of yourobjectives, financial situation or needs. Before acting on this general advice you shouldtherefore consider the appropriateness of the advice having regard to your situation. Werecommend you obtain financial, legal and taxation advice before making any financialinvestment decision.

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