There’s a huge difference between Apple the company and AAPL the stock. Back in July when the stock seemed to headed to the stratosphere I began to get concerned. At the risk of seeming ridiculous (which has never stopped me before fyi) I will quote myself at the time:
“The market value of Apple Inc. has ballooned. It really hasn’t mattered that Android devices are kicking butt; rapidly gaining market share and being adopted by the more technology-savvy consumers (the nerdy trailblazers). Until now?” July 29th, 2012
Apple’s 2nd quarter results had just been released and were considered disappointing by most analysts. However my misgivings were based more on experience than the company fundamentals. Over decades I’ve watched stock market darlings follow a pattern time and again. At the outset it’s product itself that folks fall in love with, but eventually it’s the company’s stock they become infatuated with.
Admittedly the rewards to the company are plentiful if the product catches fire, especially in the middle stages of the lifecycle (pricing power and growing demand), but gradually management is obliged to focus on producing more and more of the product; which can mean skyrocketing revenues and economies of scale (reduced costs of manufacturing) – good for the company and its investors. Eventually competition rears its ugly head, and the company is forced to innovate rapidly (rising expenses) to keep market share. Competition (Android devices offered by the likes of Samsung, Research in Motion) will inevitably cause prices and profit margins to fall.
Finding a new hit ‘premium-priced’ product is difficult to do unless the company is managed by a tyrannical genius like Henry Ford or Steve Jobs (who can be oblivious to the rantings of those myopic stakeholders who’d rather have dividends than invest in research and development).
One might think that the stockprice should mirror the fortunes of the company. But there are periods when this just isn’t the case. This is the chart I was looking at (back in the summer months) when I began to get the heebeejeebies. The financial results weren’t that impressive, but the share price had gathered its own momentum.
A GOOD THING: Lineups to buy iPhones and iPads. DANGEROUS: Lineups to buy shares.
I like to think the stock market is like a party. When my daughter was a teenager, she asked if my wife and I could disappear for a few hours one evening so she could invite some friends over for a party (I’m sure this has happened to many of you). Things went fine until a contingent of uninvited guests began showing up. No doubt a few more youngsters added to the fun, but once the house was too crowded bad things began to happen – items got broken, drinks were spilled on hardwood floors and carpets, there were empty bottles scattered all over the property and suddently her little party turned into into a nightmare.
When uninvited people (not really investors) scramble to own a stock it usually ends up like my daughter’s party. At first a few more (uninvited) investors drives up the price which is great for existing shareholders and the company. Indeed, AAPL shares continued to ramp up into the final quarter of 2012. But just like my daughters party, things began to get ugly for the stock once it got too crowded.
There is much speculation concerning the causes of the rapid decline in the price of AAPL shares: Weak demand for the iPhone V, the threat of Android market penetration and so forth. Some of this might be true, but pure speculation doesn’t ordinarily impact the price of a company’s shares this radically. Hard evidence will hurt the stock to be sure but my own experience is that as soon as people realize they’re at a party that just isn’t as much fun as they’d hoped for then they all try to leave at the same time. There is a great deal of risk associated with buying into stock market darlings.
I mentioned above that there can be a huge difference between the fortunes of the company and the behavior of the stock. It could very well turn out that Apple (the company) will continue to thrive despite the decline in the share price. After all there are a great number of people that still plan to buy iPhones. No doubt there are also many planning to buy other Apple devices.
A recent survey suggested that 50% of those asked what smartphone they intend to buy over the next ninety days said they wanted an iPhone. This is the same result Apple has enjoyed for that past couple of years. There will come a time when the company will have to come up with another big hit product or re-invent itself. After all the company was nearly banktrupt once (1987) and survived. The introduction of the iPhone in 2007 certainly gave Apple another shot of adrenalin.
There’s no evidence to suggest Apple the company is beginning to rot just yet, but AAPL the stock was due to take a bruising. Can Apple continue to take advantage of its solid franchise indefinitely without Steve Jobs? Well that’s the billion dollar question isn’t it?