The Network Garden - Mark Sigal's Blog

OMG, WTF is going on with Apple Stock?

Apple stock is down 25% since late September, and the pundits, naysayers and Apple haters are all saying that if there is this much antipathy for Apple stock, maybe the smart money knows something.

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:

1. 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.
2. 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.
3. 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.

Related Posts:

1. What is Apple Worth: The 'Gold Standard' Thesis
2. Get ready for the Apple + iPhone backlash
3. Why the Rumors About Apple Building a Television are Wrong (O'Reilly)

 

Five thoughts on Mike D'Antoni coaching the Lakers

1. It's the Mike Brown do over.

2. It's moving forward as an organization. Phil felt like a two year warrior and not always on the road with the team. I think the Lakers are trying to win now AND build for the post Kobe future. That stated, watching Kobe play this season, is there any doubt that he totally buys into the system approach to making his teammates better? It's about rings at this point, not vanity. He's been very efficient.

3. Regarding D'Antoni style as Championship worthy, it's shades of '07 Suns.That was a tough team. I can see Nash, Blake or Morris running well in that type of offense. That could generate offense for the second unit  - e.g., Blake and Hill, Morris and Gasol.

4. With DH protecting the paint, they could disrupt a lot of teams with that uptempo style.

5. I can get behind this. Pick-and-roll basketball is a highly entertaining brand of basketball.

This has a 'Return to Showtime' feel about it.

(GUEST POST) A New Engine of Growth: "Paint the Gutters"

I have written a lot about the state of the US economy, especially as it pertains to the multiple industries undergoing painful disruption and related to this, the lack of catalysts for job creation in America (see HERE, HERE, HERE, HERE, and HERE).

What follows is a guest post from a conversation post election night with Richard Knight of Korts and Knight, a kitchen and cabinetry design firm. Richard has a unique perspective, being a business man in a true "brick and mortar" segment that been been dually impacted by the rise of "showrooming" (see my piece 'Retail Needs a Reboot') and the weakened housing market.

Plus, having lived through many economic cycles over a 40 year career, his narrative and sensibility is both basic and profound:

"Quite a night last night. Glad that the campaign is finally over. Seeing the election map it is all too apparent that the country is really two countries, and that it is very hard to talk about it in one breath.

Those red states are all over the middle and the South. And then there is the blue West Coast. We are the multi ethinic, racial, diverse country that believes in the future, and is willing to embrace the holy trinity of Globalization, etc.

Then there are those undereducated white men and women, who are looking for some magic pill to restore the good old days. If we just cut back on everything, start saving, cut off the medical to poor people, and send the foreigners back home, everything will be OK.

Seems to me that it is hard to bring the entire country into the future and that whatever solutions we find will continue to add to the polarization of the country. 

Regarding an engine for growth and for job creation, your example of Uber and Southwest (in my post on 'The Age of Indivisibility') are two fine examples.

And surely we will see more of this. But its kind of like my gardener. He provides a personal service for me, and his job is safe from globalization. It is the globalization that seems to me to me the immutable fact of the future.

Uber and Southwest avoid that issue by providing a local service. There are so many people in this world who are willing to work so much harder than us, for so little money, that it is hard to deny that they will provide the products that we need. Seems that either way manufacturing jobs are gone forever. Either they are made in this country with highly automated factories, or they are made abroad with millions of little fingers. 

The US is not the first to find that changing times see great cities degrade and crumble. Cairo is a typical example. It was once a very fine and Western (maybe European) city. But time has passed it by and it is a crumbling as its infrastructure has long sense been overwhelmed.

You will see the same all over the world. The ascendent cities of China represent the new and shiny and awe inspiring result of a rising culture. I think the USA is headed down the same road as Cairo. We have stopped dealing with maintenance.

Now, I see that very clearly in the suburbs. There was a time when personal pride kept everyone's home a source of pride. Green lawn out front, the painted porch, etc etc. If you take a ride into the suburbs, you will see quite a mess. I live in what I will call a typical middle class neighborhood, and you will see that people are not keeping up.

Lawns have died, fences are falling down, and there are more and more cars parked on the streets. And if you go into the heartland, something we did this summer when we motored across the country, Ohio is really third world. Once great neighborhoods, boarded up, overrun, abandoned. 

We have seen a slow degradation of life in America. In order to keep up our "standard of living" we have resorted to working longer, putting Mom to work, and living off our equity line to finance our lifestyle.

Now, it is becoming a case of, "Where can we cut further?" I think there is a lot of "hidden" belt tightening going on. We don't quantify maintenance, but houses are starting to fall down around people. We finally did some work around our house, I hired out some painting of gutters, some fences, and little stuff, and quickly spent 10k. It looks better, was overdue, but I could have just left it alone too. My guess is that people give up on insurance, don't go to the dentist, and cut back in lots of invisible ways. 

So much of what consumers want to spend their money on, represent things to "improve" their life experience. We define that as a new sweater, or a new gadget, (iPad mini). These are the things that are highly promoted, and we are convinced that we need. And these are the things that are made abroad, and where our money leaks out of the economy.

And so my grand idea is that what we need is more maintenance. If Americans would spend their money to paint the gutters, and learn to find satisfaction in that, (rather than a new gadget) then that money would have a multiplier effect on our economy. That painter could then have the money to spend on his own house. 

Now the idea is actually much bigger than that. The recent storm on the East Coast has exposed the vulnerability of our cities to calamity. Huge amounts of money needs to be spent to "fix" the problems that we did not see coming.

Global warming, rising sea levels have changed the game from "it would be nice", to "we NEED to go to work on it."

Take NYC. Seems that electrical grid is largely underground or in basements. Seemed like a good idea when it was conceived, but not so much now. Buildings all over need to think about moving things to the roof, or to the second floor, in order to protect themselves from being put out of business by a flood. In a million ways, our cities need to reinvent themselves to deal with the climate and to refresh themselves. The 100 year flood seems to be happening every 10 years. 

And so I understand that at one time, the initiative to build the interstate highway system was a great engine of prosperity. Lots of jobs, improved prospects for commerce, and sold lots of cars, too. Our economy managed to commit lots of money to this, but it did not put a product into someone's hand. But it improved our quality of life nonetheless.

Today, we know that the roads, the bridges, the infrastructure is badly in need of repair. I think this is the place that we will find the jobs to replace the manufacturing jobs that have gone away. And this is an example where global location matters. This has to happen on our terra firma. And this money that gets spent will circulate back into our economy.

It would be nice to see money spent to make our cities shiny and new and to find a way to take pride in that, and to enjoy that rather than to seek satisfaction in products made in China. 

The ramble is over, time to get moving. Your trinity of change is real enough. The solutions may not have enough scale to solve the nations problems. Too many people need work.

So my word for the future is "maintenance". Its local, cannot be digitized, and is largely not a commodity."

Related Essays:

1. The Age of Indivisibility, and the Rise of Integrated Systems Design (GigaOM)
2. Retail Needs a Reboot to Survive (GigaOM)
3. HP, Dell and the Paradox of the Disrupted (GigaOM)
4. Assessing the Internet: Great Creator or Better Destroyer (GigaOM)
5. The Great Reset: Why Tomorrow May Not be Better than Today (O'Reilly)

The Jobs Engine: On Indivisibility and Integrated Systems (GigaOM)

There is a looming sense, a dark narrative that America’s best days are behind it. Why? A clash of civilizations. A sense in many pockets of the country that we are living in a time of anomie, inequity and worry.

Everywhere you look, there is disaster. At ground zero are the remnants of a 100-year flood known as the 2008 financial crisis; it’s a flood that never completely receded.

Put another way, whether you are politically right or left, believe in trickle down or trickle up,  the hard truth is that there are few catalysts for significant job growth in America right now.

Take a look at that one great wonder and power of our age, broadband internet. In many ways it has been an engine of growth and created whole new industries. Yet it has also set off a wave of painful disruption, through the triumvirate forces of:

• Digitization: Anything that can be turned into bits, will be.
• Globalization: Where location can be rendered moot, it will be.
• Commoditization: When bits and logistics can commoditize, they will.

In its wake it has permanently broken or even destroyed multiple industries. In fact, Bureau of Labor Statistics data shows quite clearly how such industries that were rocking and rolling prior to broadband are now sucking wind, including electronics stores, book stores, electronic components, employment services and information services, to name a few.

Less obvious, but equally troubling, is the fact that when these industries break it also disrupts the ecosystems that surround them as well, cascading in a domino effect. 

Here’s how it works: When an industry like print media goes sideways, not only do publishers and the employees housed within them go away, but so too do printers, production houses, delivery trucks, book stores, newsstands, book reviewers, sales reps and publicists. Worse, this hits regional hubs especially hard. And we now know those jobs are not coming back. Ever.

The immutability of this dynamic hearkens to a signature line in Oliver Stone’s ever timely, ‘Wall Street,‘ when broken trader Bud Fox (Charlie Sheen) asks corporate raider Gordon Gekko (Michael Douglas), “Why do you need to wreck this company?” Gekko retorts, “Because it’s wreckable, all right?”

Read the full post HERE.

UPDATE 1: Kevin Kelly, author of 'What Technology Wants' (one of the more thought-provoking books of recent years), and long time Wired writer, has written an excellent article on what he calls 'The Post-Productive Economy.' Most fundamentally, he argues that sustaining growth waves take decades to reach full bloom, yet our measures are tailored to both the wrong kinds of metrics and the wrong sense of periodicity. I think that it further underscores the truth that the strongest counters to Commoditization, Digitization and De-Localization is Integration.

Related:

1. Retail Needs a Reboot to Survive (GigaOM)
2. HP, Dell and the Paradox of the Disrupted (GigaOM)
3. Assessing the Internet: Great Creator or Better Destroyer (GigaOM)
4. The Great Reset: Why Tomorrow May Not be Better than Today