Out of the dozen or so analyses I read about what happened to Apple yesterday, the most succinct insight came from Howard Lindzon, who said “The stock market is clearly voting with Larry’s vision and daring spending at Google over Tim Cook’s cash flow at Apple.”
This irritates me to no end, seeing as how the latter is my largest holding.
It’s badly kept secret; Wall Street plays favorites. Different companies aren’t treated the same, due in part to our personal and collective biases. Yesterday Apple reported an EPS that was 98% of what analysts were predicting, and that “shortfall” led to an 8% buzzcut in the stock price.
Rhetorically… would Google or Amazon have suffered similar price declines if they missed earnings by 2%? I’ll let you decide for yourself.
Perhaps unsurprisingly, I see Apple as being fundamentally misunderstood by much of Wall Street. Investors generally buy shares because they expect returns to be primarily driven by future growth and/or price correction (if company is currently undervalued). I believe much of Apple’s 16-month malaise is due to it being in “limbo”; no longer seen as a growth stock, but not priced low enough to be seen as a value stock.
So what’s happening here? As Scott Krisiloff and Benedict Evans explain, concerns about Apple’s growth have been overblown. On the one hand, Apple is gargantuan; as the largest company in the world, it’s not going to grow at the same rate as Snapchat. Investors need to update their expectations for Apple; its industries are more saturated than they were 5 years ago. When comparing it to other huge companies, however, its growth blows the others away. As the majority of the world moves to smartphones in the coming decade, Apple is very well-positioned to maintain its sizeable portion of the market.
Furthermore, it’s inexpensive! If you look at Apple as a value stock, it checks off many of the boxes you’d typically look for: undervalued (P/E at 12.6), low debt (D/E of 13.1%), insanely profitable (net profit margin at 22.7%, ROE at 41.4%), and with an incredible competitive advantage in its industry.
So why the beatdown? Apple is the stock that Wall Street loves to hate. We were spoiled by its incredible run from 2002-2012, and now that (under Tim Cook) it’s behaving more like Microsoft than like Google, the market is treating it as such. For now, it seems that investors are content to pummel Apple. However, I have every confidence that before too long we will see a shift in the collective mindset regarding this company. It’s growing, it’s well managed, it’s profitable, it’s taking care of shareholders, and it’s undervalued… I see little not to like.