Cry Babies: The Strange, Confusing Path of the Apple Investor

"GODDAMNIT, APPLE IS DOOMED!! Wait… that’s profit? Carry on." - Jim Dalrymple

Let me preface my comments by saying that I am LONG Apple, so I am not real happy at the moment.

Consider, a company that:

• Routinely beats its own projections, generating more revenue ($54B) in a quarter than Google generates in a year. (Side note: fuck the analysts' projections - if they knew shit, they would have anticipated the collapse of DotCom, the 2008 financial crisis, etc.)
• Is consistently, mind-numbingly profitable, yielding outsized profits that have fattened their cash hoard to $137 billion dollars. You'd have to look to the gas & oil industry to find another company that is comparably profitable.
• Has not one multi-billion dollar line of business, but six of them (iPhone, iPad, Mac, iPod, iTunes, Accessories), and all of these lines of businesses feed off of a common ecosystem, creating leverage, lock-in, loyalty and all sorts of halo effects. In fact, the company sold over 75 million iOS devices in this most recent quarter.
• Is unequaled in terms of having an R&D engine for creating new products that generate massive new revenue sources -- not just defensive moats.
• Has cracked the code to selling in China ($7B in most recent quarter; 60% year-over-year growth), something few other American companies have done.
• Despite a reputation for secrecy (with new product launches - duh), sets the bar for transparency with investors, breaking out minutiae on product lines, growth rates, ASPs, sales channels, same store numbers, etc. Contrast this with comparable growth companies, like Amazon, Google and Netflix, where the details are much more surface level.

Apple Revenue by Product and Operating Segments

Thus, it is with little surprise that Apple is:

• Getting tarred and feathered after hours, down $52, or 10%. As someone put so eloquently on twitter, "I never thought I would see "$54 Billion" and "light on revenues" in the same headline. 
• Trading at a P/E of 10.4, and excluding cash, a P/E of 7.1. By contrast, Amazon is up over 20% following a report of a LOSS in their most recent quarter, and investors loved Google's most recent revenue miss (the stock shot up 5%). Oh by the way, neither Google nor Amazon pay dividends, something to keep in mind when you hear an investor lamenting that Apple should increase their dividend.

Stock Performance: Apple vs. Amazon vs. Google

 

Let me net it out for you

To say that investors are idiots, really is an unfair dig at idiots.

The more nuanced truth is that we tire of winners and root for their demise. We trust so-called experts, even when all of the data suggests that not only are they clueless but hopelessly conflicted as well. 

And most disappointingly, we don't reward transparency and being treated like adults when it comes to investing.

We respond best when we are teased, ignored or treated like children. 

For Apple, the hard truth on this one is to:

A) Be comfortable with the bottom line that rumors and outright lies nothwithstanding (I am talking about you, iPhone 5 rumor-mongers), there is only Apple when it comes to products, customers and profits. Everyone else is in the "not exactly" bucket;

B) Give up the game of sandbagging and then beating earnings, and focus investors on a real earnings range (as they did in this call) so clueless analysts and the media that lap up their dog vomit, can't harm them;

C) Embrace the Jeff Bezos ethos about being willing to be misunderstood for long periods of time, and wear that as a badge of honor with investors.

If you are Tim Cook, and company, you sleep well knowing that your North Star is as bright as ever.

But, at the same time, knowing how many investors are hysterically blind to the potent lights emitted by that star, must sting a little, no?

UPDATE:

1. Jim Dalrymple, who I quoted in the entry to this piece, writes today, "How the hell does this happen? Amazon misses its earnings, income fell, sales missed Wall Street consensus and… the stock price goes up 6 percent.Apple sells a gazillion of everything, reports record revenue and profit, and its stock falls."

Related:

1. OMG, WTF is going on with Apple Stock
2. What is Apple Worth: The 'Gold Standard' Thesis
3. Get ready for the Apple + iPhone backlash
4. Apple's North Star: Four Takeaways from Apple's Q4 Earnings Call

 

Comments

[Don]

I don't think the problem is that investors are idiots. The sad fact is that the price of Apple shares has gone up so high that few independent investors can afford it. That means most of the investments are being done by large firms with decisions for buying and selling being controlled by computers.

IMO, then, there is a two-part solution:
1) Apple should do a stock split of at least 3 for 1. 5 for 1 would be better.
2) If this happens there would be a massive influx of actual investors rather than computer-managed dogma (followed by "me too!" fund managers), however they have to learn that tech "analysts" are nothing more than carnival fortune tellers without the accuracy or the ethics.

[John]

I'm also long and have thought about this a lot. Part of the issue is psychology. People are very risk averse. They are more afraid of losing a dollar than they are attracted by the chance of gaining a dollar. In that respect Apple has already won so the fear is that someone will come along and take their place. Amazon has nothing so there is nothing to lose. It is all hope that someday they'll figure out how to make a profit. Google has a monopoly on search. No one is going to challenge them on that.

People talk about slowing iPhone sales yet iPhone sales are up by a huge amount. The problem is they can't make them fast enough.

Maybe one solution would be to make more iPhone models. If there were a phablet, the regular phone and some sort of low end phone the releases could be staggered throughout the year making it easier for the factories to ramp up volume. They sold almost 50 million phones in the quarter. That problem is only going to get worse going forward.

Perhaps this would help investors. There wouldn't be just one target to focus on as there would be iPhone releases several times per year.

[Mark Sigal]

I think that you are right that people are more afraid of losing money than making it; namely, because the low of losing is lower than the high of winning.

Similarly, there is the dual truism that: A) it's easier to sell a story about potential than reality; and B) people like simple narratives that support their conventional wisdom.

The conventional narrative is that free or low margin always wins in tech, and that being horizontal vs. vertical always wins.

Thus, it's easy to see how people gravitate to the Google and Amazon narratives.

I personally think that Apple will segment that iPhone the same way they did the mini, perhaps a different form factor than iPhone 5.

But then again, a key difference with the iPhone space is that it's backed by a carrier subsidy so "to consumer" pricing is anything from not that high (iPhone 5) to $99 (iPhone 4S) to Free (iPhone 4).

That's not a bad segmentation story, IMHO, so maybe it's unnecessary.

[Mark Sigal]

@Don, there is truth in what you say, but splits are cosmetic and artificial and that's not how Apple historically has rolled. It's like saying, people would buy more pizza if it was cut into 16 $2 slices vs. 8 $4 ones. You may feel better having two slices of $2 pizza versus one larger slice, but fundamentally it's the same amount of pizza. Obviously, I am not blind to the psychology, though.