Is it possible that a company that grew to be the dominant axe in Technology, became the largest capitalization firm in the world, and created many new categories of products, is still misunderstood by Wall Street and the Financial Press?

The short answer is yes. Apple (AAPL) remains an enigma to much of the Street. The longer answer is nuanced and complex. and therefore ignored by most players.

In no particular order, lets look at a few points on Apple prior to their earnings report this afternoon:

• Apple has run into the law of big numbers. From the introduction of iPod to its peak in 2012 the stock has gained ~9,300%. That is a number that is simply and obviously unsustainable.

Obvious? Not to everyone: Lots of hedgies plowed into Apple at $500, $600 and even $700, paying little attention to how over loved and over owned Apple had become.

• Want a more objective measure of overowned/over-loved any stock is? Look for companies that have these 3 characteristics:

1) More than 90% institutional ownership;
2) More than 90% Buy or Strong Buy;
3) 1000% gain over the prior 3 years.

You then wait for the 1st technical break. (Look out below!)

• Historically, companies with these 3 traits have presented a terrible risk reward ratio — and Apple was right there at the top and during the prior year. You can tweak these numbers when you run a screen to get a shorter list of dangerous names;

• Apple garners most of the profits in the mobile space. (See this this and this) Android may be capturing market share, but you get that when you give your product away for free.

• Will Apple use some of its huge cash hoard to raise its dividend? Possibly. Will it also do more stock buybacks? I hope not — its a colossal waste of money to anyone except Wall Street financial engineers.

• Despite what Lawrence Haverty of Gamco claimed, it is not the responsibility of any publicly traded company to help Hedge funds have a good quarter. Neither is it any publicly traded firm’s responsibility to use its capital to goose the stock short term for the benefit of this community. (Only an ass would say that).

• CEO Tim Cook is an excellent operator and executor. Don’t blame him for not being Steve Jobs — NO ONE IS.

• In the 2,000s, Apple’s P/E ratio was high — but so was its revenue and earnings growth rate. Today, its P/E is much lower — but so to are its revenue and earnings growth rate

• Its been 7 months since the last introduction of a new Apple product. We used to wait years between product introductions, and now 2 quarters is too long.

• Apple has always been a Software company that sold Hardware — but Wall Street has fialed to understand that. It is not, per the WSJ, an identity crisis.

• Wall Street has a long history of not understanding Apple. Amazingly, most of the street still seems to not get it. (See: Analysts Still Underestimate Apple: Sell-siders simply don’t ‘get’ Steve Jobs’ company from 2005 based on this post: Wall Street Remains Clueless as Ever as to Apple’s Products)

• Apple’s app universe is enormous and vastly superior to their competitors.

• When I suggested selling or hedging Apple positions, it was due to many of these technical and quantitative factors. I put a $500, then a $350 downside target on the stock, which had gotten way ahead off itself. The key for traders is managing their position.

• Investors need to understand the difference between a company and its stock price. They are not the same thing. The valuation is a function of the firm’s growth rate and profits. Sometimes a stock gets mispriced relative to these factors.

• Traders never seem to care — if its going up and they are long, they like it. When it stops going up and they are long, they cut and run. This is how it has always been.

Category: Investing, Technology, Trading, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Random Thoughts on Apple”

  1. [...] Barry's random thoughts on Apple post is very good.  (TBP) [...]

  2. Chief Tomahawk says:

    Excellent analysis, BR! I’d have to watch a week’s worth of talking heads on CNBC to get half of this.

  3. farmera1 says:

    “- CEO Tim Cook is an excellent operator and executor. Don’t blame him for not being Steve Jobs — NO ONE IS.” True.

    In my opinion there is a much larger point. There is only one Jobs, and anyone else will fall short, way short as you implied. Being an excellent operator and executor, makes Cook one of hundreds and maybe thousands of people, it doesn’t make him Jobs.. Jobs was a rare bird, that could stand along side Tesla, Edison, Rockefeller, Carnegie and Paige. There have been a small handful of truly great creative people in recent history (150 years or so) that can create unique things and in some cases make money.

    Jobs leaving and Cook coming was an obvious straw in the wind. This was the only occasion that I have ever made a post on this board about a specific stock, and the post said short Apple. When Jobs stepped aside it was obvious that Apple was in trouble, based on history, (as in what happened the last time Jobs left Apple), and the stock price based on perfection/utopia/trees growing to the sky etc. It was probably one of the clearest shorts ever.

    So as I read your post, maybe it is now time to buy a good stock like Apple?

  4. Interesting to see if this is still operational:

    Apple’s Earnings Have Lately Been Bad News | Seasonal Odds
    http://www.seasonalodds.com/apple-earnings-2/

  5. peachin says:

    Wall St. has taken a dislike to any company that “Stonewalls” information that can help it manipulate stocks.
    At the end of today – “real” information about AAPL will surface … The stock will be jerked around until sometime Thursday… when the dust settles between players, traders and losers. 3 minutes before the close on Thursday The Full Moon is at it’s peak. What does the Full Moon have to do with the markets – nothing! It creates pressure on Humans, Nature and Animal Life…. By Monday we will have a new Market going forward… and an abnormal change of individual stocks direction. I believe the AAPL info will not be enough for Bulls nor the Bears -

  6. Bam_Man says:

    Apple definitely seems to be misunderstood and unappreciated by investors. Thinking “outside-the-box”, if the share price goes any lower than say $350, I wouldn’t be surprised at all to hear Braeburn Capital announce that they are taking the company private at $450/share or so. What is the point of being a public company when there is no foreseeable need to raise capital? Heck, it is already run like a private company anyway. Everything is a secret. Months at a time go by without a peep out of management. Maybe that has been the plan all along and why they continue to hoard such an inexplicably huge amount of cash and do absolutely nothing to support the share price.

  7. BennyProfane says:

    The first great asset bubble and pop resulting from the QE pumping. Maybe the rest of the market follows, eventually?

    I bought Apple at 18 in 2000, and sold at 26. I was so smart.

  8. AHodge says:

    i owned apple calls from near the bottom to $340 couple years ago
    missed most of the i phone excitement
    you could argue i sold 50% too early
    if someone forced me now i would be long rather than short.
    awesome unique company
    not an awesome unique risk reward for the stock or options plays i can see

  9. Another interesting discussion:

    Deus Ex Macchiato A blog about rules and behaviours My ipad, and your derivatives
    http://blog.rivast.com/?p=7141

  10. libertarian says:

    AAPL only has 60% institutional ownership. Personally, I’m surprised by how “not” over-loved the company is, given people in countries around the world line-up for miles at their stores for any tiny update to a product. I would have expected the company to be selling at 1000 P/Es given the hysteria of their products. This is not all to mention that they’ve got over $140b in investments and cash. It’s a like a tech/investment firm, at only a 10% payout that could easily match that to 40% (would prefer buy backs so I’m not double taxed). Yes, margins are high, but it’s still undervalued if you absolutely plummet their margins to the industry average. However, what industry are they really in? Who do the compare to? Google? Well, google is only about content. Samsung? No, they’re only about hardware.

    I must live in a different world. All I see is over 95% of everyone I know being mesmerized by a decent phone that they vow loyalty to and refuse to ever switch (they’re computers on the other hand, I’m always a buyer of, primarily for the OS). All I see now is an investment world that hates a firm with still immaculate books and potential to innovate, still. Even if they don’t innovate, they’ve got an absolute cash cow infrastructure that they’re only building on. If shown only the fundamentals, I don’t know any intelligent investor who would want to “short” until they learn it’s AAPL.

    Just some thoughts. Not sure how the rest of the world is working, but last time we were in Asia, people couldn’t wait to see an iPhone. It literally drew crowds. Just confused where all the “haters” are coming from.

    If I had to choose either AAPL or the S&P 500 to invest in, hands down AAPL. That’s just me. Yet, I’m very bearish on the S&P over the next decade. AAPL’s down 40%, I’d like to see the same in the markets before diving in again.

  11. Mike in Nola says:

    BR, I think you got it about right.

    Even Jobs’ could not have kept up the growth because of the math involved. Apple isn’t going away but will become something like a bigger Microsoft cranking out billions a quarter but not exciting the Wall St. crowd because the stock may no longer have the potential for a big run up. After some bounces based on the large recent drop, It could well become moribund like MSFT’s which has basically been in a trading range since 2001 despite doubling earnings.

    Although it was tragic, going out when he did will probably preserve Jobs’ reputation and keep the “what if’s” alive. I imagine there will be complaints about Cook years down the road if he is as stubborn as Ballmer and hangs on even though no one else could do much better at moving the stock price.

  12. Orange14 says:

    I’ve long been a contrarian regarding the type of company Apple is. From my perspective under Jobs they were a great industrial design company that was able to pick up innovations from others (XEROX PARC being the primary) and repackaging them into a design that was extremely appealing. They did not break any major new ground except for the original Apple computer that was probably more due to Wozniak than Jobs. Everything else was well thought out incremental design. I’m in the process of building a new PC and I can get equivalent or better performance from it than the comparable Apple product. The only Apple product that I’ve ever purchased is an iPod (maybe 7-8 years ago). I’ve had to change the batter once (did it myself) and see no need to upgrade to a newer model.

    Apple has sadly been missing on enterprise architecture and applications and one wonders whether MSFT will prevail in terms of cloud office applications. I suspect that the company will continue to be profitable but it does seem that iPhone sales are decreasing and Samsung Android products are quite stunning. Interesting times ahead for Tim Cook.

  13. Moss says:

    It will be interesting to see if they remain totally proprietary. With Jobs and the cool factor this worked. Not sure if it will serve them well moving forward.

    • Of course they will remain totally proprietary — thats where their money comes from.

      They tried clones int he 1990s and it didnt work

    • dsawy says:

      There’s no way to deliver the “it just works” experience to consumers without locking down both sides of the hardware/software interface. Since that’s Apple’s perspective on technology, I think they’ll continue with the proprietary system and locked-in software into the foreseeable future.

      I was an engineer on both sides of this argument in my tech career. People who keep chanting “open systems” are invariably people who aren’t tasked with supporting them for paying customers. Support costs can eat a tech company alive. There are only two ways to get rid of these expenses: either lock the hardware and software, so the engineers can deliver a “just works” product (eg, Apple, cisco routers/switches, etc) or you ignore customers when they have a problem (like say, a certain company out of Redmond, WA).

      When I was done with tech and wanted our household machines/systems to “just work” because I wasn’t going to invest hours or days of screwing around with systems to get them to do what I wanted, we tossed out all the Windows/Linux/*BSD machines and went to Macs and OS X. When we need Windows (or anything else), we use guest OS’s under VMWare. Done deal. Now computers do what I want, when I want. If I need a Unix development environment, I have one on the Mac in as little time as it takes me to launch a Bourne shell in a terminal window. If I need to port “open” software, there’s how I do it. Pull down a repository, build it as a Unix program and go get stuff done rapidly.

      From my perspective, the premium we paid for the Apple products has been returned more than tenfold for time not wasted over the last five years.

  14. agronox says:

    Will it also do more stock buybacks? I hope not — its a colossal waste of money to anyone except Wall Street financial engineers.

    Whoa, BR… citation needed on that one.

    Now, if you’re saying that buybacks often occur when things are going great for a company, usually during a boom when a stock’s P/E is already relatively high, and are thus money squandering, I agree. But otherwise, aren’t you throwing out the baby with the bathwater?

    For a company like AAPL it makes a lot of sense to buy back shares. Their P/E is low, their cash flow can support a big buy, and shareholders are getting killed out there.

    • There is a huge amount of academic data on this, but the best way to contextualize this is consider the odds of management making buys at advantageous times or not.

      Dell is he poster boy for bad stock buybacks — they spent more money on share buybacks than they earned in profits — ever.

      • TheUnrepentantGunner says:

        Jeff Matthews also has alot of great anecdotes if you don’t want raw data on some horrific buybacks going exactly as expected.

        With that said, I am not as constructive on AAPL’s long term future.

        The company will be fine, sure. But if it’s become a value stock, as barry (correctly probably) argued, I’d personally want value in an arena where there isn’t so much uncertainty over the future of the industry. Or if i want warts, i really want ugly big warts and stocks that are totally unloved, as opposed to simply divisive.

        Then again, my cognitive bias may be in play here. I feel the same way about goog, and just sold mine at 790 something yesterday, knowing full well it could hit 1000 in the nearish future.

        I’ve also had to talk myself out of (or get someone to help talk me out of) buying alot of ugly investments including DG, and a few others i’m too embarrassed to name.

      • Orange14 says:

        BR-you are correct about stock buybacks but the issue here is that Apple really does not have a big R&D budget in the same way that Intel or even Microsoft does. As I noted in my earlier post, most of the work was in the design area and there wasn’t much in the way of software development going on. Even with the design stuff, it wasn’t as though they were developing a new chip that required lots of R&D and also manufacturing capacity. Once the design was done, almost everything ended up being outsourced. To your point about proprietary, that’s right on the mark. The only way they are able to sustain the profit margins is being the only kid on the block with the Apple OS and the hardware that supports it. The bottom line for consumers is whether they want to pay the premium here and so far the answer to that is yes they do.

  15. Greg S says:

    As a fundamentals guy, Apple has been a tough lesson to pay attention to technicals. I also learned that it is really painful to go from $700 to under $400 even if you are still sitting on profits (at least I was smart enough to take some profit along the way).

    My response to this has been to work on some basic sentiment and technical indicators to add to my buy and sell criteria. The ones you list above are great. It will be a process for me, and more mistakes will be made I’m sure. I also need to step back, look at the sentiment as a whole, and use common sense. There is a difference between market enthusiasm and a cult and Apple has been in the latter category for some time. If your fellow shareholders look and sound like the Gold Bugs, watch out.

  16. [...] random thoughts on Apple.  (Big Picture also Michael [...]

  17. Robert M says:

    to the editor
    Please move this to the appropriate thread when you can. I would have used morning reading but the comments are currently closed
    BR
    I know your a big jazz fan so how cool is this; 3-d printing of old vinyl albums. I hate to see the artists lose so hopefully the companies will set up shops like those that custom fit jeans and sneakers so you can by old vinyl.
    http://www.apartmenttherapy.com/3d-printers-could-one-day-print-vinyl-records-on-demand-instructables-188319

  18. investmentbanker says:

    Does anyone else find the eulogies of AAPL growth a tad Eurocentric?

    We all know the growth was unsustainable, but reading the headlines makes it seem like the company flatlined and inspired the smart money to rush for the exits.

    BR, I find myself in general agreement with much of your analysis, but I think even a 700ish-word abstract should cover their recent R&D into lower-end products and potential for growth in China. A growing middle class offers millions of reasons why, as Steve Jobs said, “reports of my death are greatly exaggerated.”

  19. investmentbanker says:

    [correction]: FAIL

    “Wall Street has fialed to understand that. It is not, per the WSJ, an identity crisis.”

  20. Livermore Shimervore says:

    Apple are masters of refinement….NOT masters of innovation or invention.

    The two things that have taken the company’s valuation are refinements of existing devices.
    Palm already had smart phones (before the iphone) which no one wanted and many had tablet-esque devices (before the Iphone pad) that did not catch on either. As long as there are consumer products that require refinement, “apple-ization” of that product is very likely and the legions of “I buy anything Apple I don’t care if others choices are better” are willing to spend a large portion of their discretionary income on those Apple-fied products. Case in point, fanboys waited in line for an Iphone 4/4S that was still only a 3G device when most phones were 4G and some with 3000+ mAh batteries could last a whole day (Razr Maxx). Apple have a Buffett’esque “moat” that is not a tech moat but an extremely loyal customer moat. Apple will continue to grow at a pace well beyond nearly all of their peers because refinement is easier than innovation and it will take quiet a magnificent product to lure the committed Apple deovotee away from the familiar. The question is what is the next product that works in theory, looks attractive in person but is just not compelling at the retail level yet. That’s Apple’s next big pay day.

  21. locker1776 says:

    http://techcrunch.com/2013/04/23/apple-will-initiate-share-repurchases-to-increase-dividends-and-boost-apple-shares/

    Ironic that Apple does the one thing you scream at them not to do! I guess that sometimes the “accepted” thing to do is equated with the “right” thing to do.

  22. kaleberg says:

    Apple is an old fashioned computer company selling the hardware, software, interfaces and so on. It’s like DEC or Prime or the pre-PC IBM. Integrated product development is no longer fashionable, because financial guys are uncomfortable with anything that can’t be outsourced. This gets us gems like the Boeing 787, privatization and a hollow national economy.

    When you are a financial guy, as most managers and so many professional investors are, there is a tendency to think that anything that can be split without violating the rules of accounting should be split, ignoring the costs this entails in terms of being able to operate and innovate. This is, of course, a fad. There are times when it is profitable to combine accounting entities, and there are times when it is profitable to split them. Right now, we’ve been running on the splitting side of the curve of binding energy, but I’m guessing that high corporate profits and low interest rates are going to change this in the next 5-10 years.

    Apple was always an extreme case. As a computer company it is an atavism. Its desire to sell a complex product with innovative hardware and software drives it to acquire technology companies rather than purchase from them. As Steve Jobs found out repeatedly, when Apple couldn’t buy the company it would wind up paying for it in the long run. Look at the fouled relations between Apple and Google. Even better, look at Apple and Samsung. Apple couldn’t afford to buy Samsung when it built the iPhone, so it wound up creating its only profitable competitor in the phone market.

  23. David Pierce says:

    Samsung Galaxy S4 review

    The GS4′s primary competitors are the iPhone 5 and the HTC One, and from a pure design perspective that should make Samsung very, very nervous. Where Apple and HTC have both made beautiful, well-made, high-quality phones, the GS4 has Samsung back in the land of cheap, plasticky handsets. It looks for all the world like the Galaxy S III — despite having a bigger screen and more horsepower, at 7.9mm and 4.6 ounces it’s actually imperceptibly thinner and lighter than the S III. But copying the S III wasn’t a good idea.

    I don’t like holding this phone, and I can’t overstate how much that informs the experience of using it. It makes an awful first impression, slippery and slimy and simply unpleasant in your hand. My white review unit is completely smooth and glossy, with a subtle checkered pattern that looks textured but is neither grippy nor textured anywhere on its body. Even the silver band around the sides, which is obviously supposed to look like metal, is plastic. Everyone I showed the GS4 to frowned and wrinkled their nose as if it smelled bad, before rubbing their fingers on the back of the phone and then handing it back to me — that’s the opposite of the standard reaction to HTC’s One, which everyone wants to ogle and hold. That’s going to be a huge problem for Samsung, because the GS4 and One are likely to be next to each other on store shelves, and at least on first impression there’s absolutely no contest between the two

  24. Just How Did Apple “Journalism” Get This Bad?

    I swore that I wouldn’t write stuff like this. “No, Ian”, I said, “skewering the stupid is pointless. You only end up bitter and twisted by maintaining the necessary level of vitriol required.” But sometimes… you’ve just got to do something.

    When I learned to be a journalist, we had one rule: We did what was the right thing for the readers. That sometimes meant annoying companies like Apple, if “doing the right thing for the readers” meant giving them details of an unannounced Mac. Sometimes it meant giving large advertisers bad reviews. But whatever it meant, it always meant giving them the truth: facts we found out, put into context so the readers could understand what was going on better.

  25. V says:

    My analysis was a little simpler based on user experience. The move to the lightning connector for me was a turning point. (as superstitious as that sounds)
    Undermining your installed userbase is never a good move for any company historically, regardless of the technical merits. At a minimum it gives the customer pause to consder the options now that their expensive and aesthetically pleasing accessories had been rendered useless without adaptors.
    Also there was a less publicised (but if forumn reports are any indication – huge issue) issue with 3rd party charging cords (and some genuine cords) rendered inoperative via firmware upgrades, i.e. even on USB computer connections units would not charge.
    Now while this might goose short term new genuine cable sales, I believe there would be some reputational damage as cables that used to charge devices fine suddenly didn’t.

    Thats not to say a new Apple product wouldn’t renew market interest but the iPad/Pod/Phone/Tablet market is now mature.

  26. Born Again says:

    Is Apple a better value stock than Microsoft, or are these strictly thoughts on Apple?

  27. Livermore Shimervore says:

    I mean like other wireless devices. Apple for all the cash they haul in sales are an extremely limited company as far as product offerings. I suppose its in keeping with their “police state” like control freak nature to limit the variety of their devices but in the end that can be well…limiting. For instance, you can’t use a mouse with their Ipad. Huh? They only sell ONE size phone display?? Huh #2? They are trying to shoe-horn everyone into their sales regime. “don’t make the Ipad too versatile because then they won’t buy MacBook Airs”….”Don’t make the Iphone screen too big (aka useful) because they won’t buy or carry around an IPad”. Meanwhile Samsung are innovating a phone tablet (Note2) which is one of their most popular phones and Asus are selling tablets with keyboards (Prime Transformers) that charge the tablet when docked and that also work as a hard shell display cover. People would buy those things if they had the Apple logo on the back… And these innovations lead to other products, largely based on customer feedback/requests.

    Apple have bounced off the ceiling, as far as valuation — granted few companies have managed to hold onto such heights for long, and its primarily due to this “use our products our way” framework. they’re going to have to start thinking outside the Apple sandbox for once and come up with products that do more things and do some new things. They have to stop being 1 or 2 product cycles behind what the competition are doing on hardware (ie NFC, LTE, high capacity baterries, Micro SD). This is going to mean less emphasis on making “beautiful” products that provide you with a “beautiful experience” and more attention to the functionality. Becuase functionality is what is going to drive their next big thing. No one at first bought an Iphone or an Ipad because it was so Jobsian beautiful and made you look cool… they bought these because they filled a functional void — full, legit internet on a phone, and all day laptop functionality on a tablet.

  28. [...] Random Thoughts on Apple Barry Ritholtz [...]