Last year around this time, Apple was viewed by the market as a company that could do no wrong. Coming off of the successful launch of the iPhone 6 and 6 Plus, Apple reported what was then the largest quarterly profit of a public company in history—a whopping $18 billion. That was up over 37% from the same quarter a year ago. Impressive numbers to be sure.
In the first two months of 2015, Apple shares catapulted higher by over 20%. During those two months Apple’s market value increased by over $150 billion dollars—that’s about equal to the total market value of Walt Disney or IBM or Visa or PepsiCo.
The analysts at Wall Street’s big brokerage houses were falling over themselves to raise their price targets on the shares. At the time, over 70% of the analysts following the stock said it was a buy, another 26% rated the shares a hold, and only a handful of folk rated Apple a sell.
It wasn’t only analysts who were bullish on Apple. Apple shares were widely held among retail and institutional investors (and they still are). Even many portfolio managers who didn’t like Apple owned it anyways. How couldn’t they? With closet indexing so dominant in the mutual fund industry, portfolio managers who eschewed Apple shares were taking serious career risk. On January 31st of last year, Apple accounted for about 4% of the S&P 500. Not owning Apple was too big of a bet for those managers whose goal it was to beat the S&P 500 on an annual or quarterly basis.
We don’t follow Apple faithfully as it doesn’t have a long enough dividend history to make it onto our radar, but as the largest publicly traded U.S. company we do feel compelled to periodically opine on the stock.
Here’s some of what we wrote last year in the March issue of Intelligence Report when calls from Wall Street to buy were deafening.
What drove the strong results at Apple? The same thing that has driven results at Apple for many years now: the iPhone. For all intents and purposes, Apple is a mobile phone company. Almost 70% of revenue, and an even bigger share of profit, came from the iPhone last quarter.
This is Innovation?
Why were consumers so eager to snap up the iPhone? Did Apple release a breakthrough technology with the iPhone 6 & 6 Plus that consumers couldn’t live without? Nope. Sales were driven by pent-up demand for a larger iPhone screen. That doesn’t sound like Steve Jobs style innovation, does it?
There is no doubt that Apple makes first-rate products, many of which I use and like. But that is no reason to buy the stock. I also liked my Nokia phone and my Blackberry. You can see how things worked out for both companies in my chart below.
The history of mobile phone manufacturing and computer hardware manufacturing in general is ugly. Over the last few years, Apple has ridden a Steve Jobs wave of innovation that has allowed the company to maintain some of the highest margins in the industry. But the odds of Apple maintaining those margins far into the future are about the same as the odds of winning big on the roulette wheel.
I can make a much better case to sell Apple shares short than I can to buy them. Probably not for another quarter or three, as there is momentum behind the iPhone 6, but without Jobs at the helm, Apple has so far proven itself to be an also-ran in the innovation department.
Apple reported its first quarter 2016 results earlier this week and Wall Street wasn’t so happy. iPhone sales, still Apple’s main profit center, were flat. The stock sold-off on the news. From the February high of last year, Apple shares are now down 28%.
We stand by the bearish theme on Apple we wrote about last year. After the sell-off, Apple shares do look real cheap on conventional value metrics so a shift in sentiment could do some real damage to a short position, but as a long-term buying opportunity, there is much more downside risk in the stock than the low valuation would imply.
Jeremy Jones, CFA
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