The narrative reasoning behind this is straightforward, and it goes like this. One year after Steve Jobs' death, Apple's magic is gone. Siri sucks. Maps suck. iOS 6 is buggy. There is no more iPod, iPhone or iPad like 'breakthrough device' in the offing. Tim Cook isn't Steve Jobs-like in keeping his management team moving in lock-step. The Apple Retail hire was an obvious cultural miss-fit from day one.
Finally, the competitive offerings are getting 'good enough,' meaning: A) Margins are destined to be under pressure; and B) The flow of devices into customers hands, and cash into Apple's coffers, are poised for disruption.
First off, let me say that in early September I predicted this EXACT backlash to play out following the iPhone 5 announcement (see: 'Get ready for the Apple + iPhone backlash').
You can read the piece to gauge the many reasons why market indigestion was a given, but that doesn't address the larger question of whether Apple has really lost its mojo, or not.
I have three thoughts on this one:
- Stock Value: Apple is trading at a trailing price-to-earnings (PE) ratio of <12, and a forward PE of 9. By contrast, Google, which missed its latest earnings, is trading at a trailing PE of 20, and a forward PE of 14. Unless you believe that Apple is worth 60% of Google, it doesn't take a rocket scientist to conclude that something is amiss. In fact, the always-excellent Andy Zaky at Bullish Cross has done detailed analysis showing why at no point in recent history has Google been a better investment than Apple (see: 'Buy Google or Apple? The Answer is Simple'). Similarly, I wrote a piece some time back arguing that Apple is a "Gold Standard" investment, reserved for category leaders that consistently out-execute the competition; the point being that Apple's peers are not HP and Microsoft, but rather, Amazon, Google, Disney, Nike, McDonald's, Southwest Airlines, Berkshire Hathaway, Proctor & Gamble and Coca Cola. So what are those guys trading at? Factoring out Amazon, which trades at a wacky PE of 2,679, the averaged PE of those companies is 17.32. Again, Apple is trading at a PE that is 68% of the value of the Gold Standard companies (see: 'What is Apple Worth? The 'Gold Standard' Thesis'). The key point here is that whether you believe, as Andy Zaky argues, that Apple is a $1,000 stock in the next year or not, you should have conviction that Apple's stock values are out of whack.
- This Time is Different: Uh, no. Actually as Horace Dediu at Asymco shows, Apple has had multiple of these types of valuation contractions over the years, as the market is fairly simplistic, dumb and reactive when it comes to the Apple narrative. Also, know that Q4 is routinely their weakest quarter since it's the wedge between back to school and holiday, and typically the new iPhone launches late in the quarter, meaning that revenue does not pop until Q1, the holiday quarter. Analysts always miss this, and in fact, last year the stock dropped 13% based on the same narrative. Just as last year, the miss was analyst numbers, not Apple's, something that I noted then. In fact, following last year's Q4 disappointment + end of year tax selling through to their Q1 earnings call (end of February), the stock went up 44%. If it did something comparable, the stock would trade at $750.
- Apple and its Ecosystem: The other big picture is whether there are systemic issues fundamentally breaking Apple. Corporate culture is certainly a risk, and I am NOT betting that the company has another breakout iPad or iPhone type of device in 2013 (color me dubious on a game-changing Apple TV, which I blogged about HERE). Then again, they don't have to, as they are not priced richly, and there are a lot of legs left in iPhone and iPad in my opinion. Margins? Well, the margin story never ends, and yes, iPad mini tightens margins a bit, but then again, Apple's stock price assumes a margin collapse. What happens when margins tighten, but it's minimal? Is Apple losing business? Are they losing profits? Are they failing to generate cash? The answer is obvious - NO - so it really comes down to your intestinal fortitude and cash urgency as an investor.
Obviously, I know no secrets, but if I were you, I would embrace the Warren Buffett-ism: Be greedy when others are fearful, and fearful when others are greedy.
The market is acting fearful. Be greedy.
UPDATE: I thought that Tim Cook's comments on the relationship between integration and collaboration (in BusinessWeek interview), and how the translates to uniquely Apple execution was instructive. There are a small handful of companies on the plan that have the DNA to do this.
- What is Apple Worth: The 'Gold Standard' Thesis
- Get ready for the Apple + iPhone backlash
- Why the Rumors About Apple Building a Television are Wrong (O'Reilly)