Apple's big decline
It is well known that Apple's stock price has declined in a major way over the last five months. From a high of $705 in September 2012, it has traded a low as $435 and now stands at $460. The stock now trades at roughly a 10x P/E versus a 15x average for the S&P 500. The dividend yield is now 2.3%. Both revenues and earnings were up approximately 50% in 2012. What's going on here? Some thoughts follow, not necessarily answers.
---With the huge gain that investors have had in AAPL over the last ten years and everyone almost certainly knowing that a rise in capital gains rates in 2013 would come, it can be suggested that tax motivated selling went on throughout the fourth quarter. Investors could sell a partial amount of their AAPL position to avoid the increase in taxes, and yet still have a large position remaining in the stock due to its appreciation over the years.
---New competition is on the rise. Hewlett Packard, Dell, and others were vanquished. Now Google and Samsung seem to be on the rise as viable competitors. No one so far has the uniform technology platform that Apple has to link all devices seamlessly or has anywhere near the applications available, but in certain products there is, on the margin, product development that could rival Apple, in price and quality.
---Steve Jobs is, of course, no longer there. He was an icon of the industry and investors had blind faith in him for good reason. Tim Cook is no lightweight, an accomplished and capable experienced Apple hand by all accounts, but no one can replace the aura that surrounded Jobs. It will take time to build management's reputation to that level again, despite their product superiority and range.
---Higher costs can be expected as pressure on their supply chain in China for higher wages and better working conditions will filter through. Apple's standards and supervision were apparently high for Chinese workers relative to many firms, but that bar is rising and Apple must and will respond. The prospect of moving some production back to the U.S., as Obama lauded on his State of the Union address, will have an unknown cost in money and quality. Maybe it will be neutral or beneficial but until investors know the answer to that question, it will remain an open issue. Are there American workers that will do that kind of precision and tedious work, that have the skills to do it, and the tenacity to stick with it. There must be, but there might be documented immigrants involved. Once established, will the unions or the Justice Department step in and focus on the company in a negative way. There are so many variables here.
---This final thought is directed not just at Apple but at other firms with top tier market capitalizations. What is the impact of having so many passive investors in the form of index funds and unidentified retail, insider, and foreign positions. With Apple passive index funds hold 15% of shares and that's just the part that is held by the top ten holders. It is likely quite a bit higher. Unidentifiable retail, insider, and perhaps foreign positions account for 35% of all stock outstanding. So is there any importance to the fact that less than 50% of stock outstanding is involved in pricing the stock. Looking at Exxon and Microsoft one could suggest that it is not a moot issue. I am not convinced that it is important in Apple's case but would like to understand the importance of this better now that a big rebound in stock price makes sense. Any thoughts out there? --- public response JL???
Should Apple do a four for one split or some similar gimmick. Should it make a spectacular dividend distribution to shareholders or begin a massive stock buyback, ideas to address their cash hoard that are now afloat in the investment community. One part of Apple's secret sauce is that they use this cash to make below market loans to suppliers who must ramp up investment with each new device that they make, each new upgrade to existing devices. No advice here but the stock must be undervalued under any analysis at these levels. Unless there is some slowdown in new product delivery and earnings and revenue growth, and that is not expected, Apple is now, as they say, a "screaming buy".
Postscript, 3/23 --- the comment attached by "your Irish friend" several weeks ago is worth considering as another comparative valuation issue. Part of its premise was validated in an NYT business section article today. Take a look if this post is still on anyone's radar.
---With the huge gain that investors have had in AAPL over the last ten years and everyone almost certainly knowing that a rise in capital gains rates in 2013 would come, it can be suggested that tax motivated selling went on throughout the fourth quarter. Investors could sell a partial amount of their AAPL position to avoid the increase in taxes, and yet still have a large position remaining in the stock due to its appreciation over the years.
---New competition is on the rise. Hewlett Packard, Dell, and others were vanquished. Now Google and Samsung seem to be on the rise as viable competitors. No one so far has the uniform technology platform that Apple has to link all devices seamlessly or has anywhere near the applications available, but in certain products there is, on the margin, product development that could rival Apple, in price and quality.
---Steve Jobs is, of course, no longer there. He was an icon of the industry and investors had blind faith in him for good reason. Tim Cook is no lightweight, an accomplished and capable experienced Apple hand by all accounts, but no one can replace the aura that surrounded Jobs. It will take time to build management's reputation to that level again, despite their product superiority and range.
---Higher costs can be expected as pressure on their supply chain in China for higher wages and better working conditions will filter through. Apple's standards and supervision were apparently high for Chinese workers relative to many firms, but that bar is rising and Apple must and will respond. The prospect of moving some production back to the U.S., as Obama lauded on his State of the Union address, will have an unknown cost in money and quality. Maybe it will be neutral or beneficial but until investors know the answer to that question, it will remain an open issue. Are there American workers that will do that kind of precision and tedious work, that have the skills to do it, and the tenacity to stick with it. There must be, but there might be documented immigrants involved. Once established, will the unions or the Justice Department step in and focus on the company in a negative way. There are so many variables here.
---This final thought is directed not just at Apple but at other firms with top tier market capitalizations. What is the impact of having so many passive investors in the form of index funds and unidentified retail, insider, and foreign positions. With Apple passive index funds hold 15% of shares and that's just the part that is held by the top ten holders. It is likely quite a bit higher. Unidentifiable retail, insider, and perhaps foreign positions account for 35% of all stock outstanding. So is there any importance to the fact that less than 50% of stock outstanding is involved in pricing the stock. Looking at Exxon and Microsoft one could suggest that it is not a moot issue. I am not convinced that it is important in Apple's case but would like to understand the importance of this better now that a big rebound in stock price makes sense. Any thoughts out there? --- public response JL???
Should Apple do a four for one split or some similar gimmick. Should it make a spectacular dividend distribution to shareholders or begin a massive stock buyback, ideas to address their cash hoard that are now afloat in the investment community. One part of Apple's secret sauce is that they use this cash to make below market loans to suppliers who must ramp up investment with each new device that they make, each new upgrade to existing devices. No advice here but the stock must be undervalued under any analysis at these levels. Unless there is some slowdown in new product delivery and earnings and revenue growth, and that is not expected, Apple is now, as they say, a "screaming buy".
Postscript, 3/23 --- the comment attached by "your Irish friend" several weeks ago is worth considering as another comparative valuation issue. Part of its premise was validated in an NYT business section article today. Take a look if this post is still on anyone's radar.
posted by John Borden at 5:29 PM
1 Comments:
Apple's competitive issue may not be understood by its diehard devotees in developed countries. No one can compete with the seamless connectivity of the various Apple devices, those that exist and surely those still to be introduced. But for a huge growing segement of potential cell phone and smart phone buyers in developing countries, this may be of no importance at all. They want and likely can only afford one device and its connectivity to other technology is irrelevant. Apple's allure has serious competition in single device users all over the developing world, and Samsung, among others, is there.
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