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Elmwood Wealth Management

The Apple Stock Controversy

In almost every client meeting recently we have been asked the question, “What’s going on with Apple”. So we thought it appropriate to address this question to a broader audience.

The chart at right shows Apple over the past four years, but it’s not a chart of Apple’s stock price. This chart shows the combined search results of Apple’s ticker symbol, ‘AAPL’, and the word ‘Apple’. It includes every Google search worldwide that has anything to do with Apple’s stock, its’ products, or the company itself. Search results have been fairly consistent over time showing volatility mainly around earnings reports and new product announcements. There are two dramatic spikes, however, that clearly stand out. One is marked with the letter ‘C’. This represents Steve Jobs death in October 2011, which is quite understandable. The other dramatic spike marked with the letter ‘A’ was in September 2012. This spike just so happens to coincide with the peak of Apple’s stock price when it touched $700 per share.

          Market Update:  May 23, 2013 

This chart implies that during spike ‘A’, we experienced something that could only be described as Apple mania. As a result, the stock no doubt got caught up in the endless news stories. So let’s set aside the emotional bias on this stock and look at it from a fundamental perspective. Here are a few of the outstanding issues that concern investors:

1. Profit margins on the iPad Mini, and iPhone sold into emerging market economies are less than the corporate average.

2. Apple has already sold iPhones to so many people, that they now will have to rely more on just selling upgrades to these same customers.

3. No new products have been announced recently, and expectations are that consumers will have to wait until the fall until any new products are launched.

A stock with declining margins and lumpy earnings usually does not argue for a premium valuation. That’s what makes

Apple so interesting right now. The stock’s valuation is quite low and it appears to have priced in all these issues. Let’s take the other side on these arguments:

1. iPad minis and iPhones sold into emerging markets do have lower margins, but it still is revenue growth and they continue to build out their customer base.

2. The millions of customers are loyal and are locked into the Apple ecosystem. They will gladly wait, and pay, for the next upgrade.

3. New product expectations ran so high last year, and now have fallen so far, it would be easy for Apple to surprise us, once again.

Looking back, it is clear that the euphoria last fall was misplaced, just as the current overly negative tone now has gone too far. When Apple reverts back to being priced on fundamentals vs. emotions, it will again be a strong stock.

Search Results for Apple 

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