The Rise and Stall of Apple (AAPL)

Tech stocks do not grow old gracefully, and Apple is no exception

   

Apple (NASDAQ:AAPL) reports quarterly earnings after the close today, and you would be excused if you were to think that maybe they were about to unveil the secret recipe for Kentucky Fried Chicken.

The reality is that this is not really an important event any more, and I find myself not really caring.

Back to the Beginning

jmta aapl 422 300x188 The Rise and Stall of Apple (AAPL)
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What a change, huh? Yet in many ways, it’s also a throwback. For many years, Apple was an afterthought in the computer industry, the lovable mutt that made seemingly cool products that mostly hipsters and artists really used. Shares languished for their first two decades. By 2001, it was literally trading for less than the cash on its balance sheet — more valuable dead than alive.

Then the company had the brilliant idea that you could make a new-age Walkman cool with some industrial design, and disintermediate the music industry by letting customers buy songs a la carte. It’s hard to believe that the company went on to become a $650 billion Goliath — the most valuable company in the history of Earth at its peak in September last year — on the basis of that single idea.

Of course, it was more than the iPod. It was the iPhone and then the iPad, and laptops with amazing screens and sleek designs. For several years the company did not really need to advertise. Everything its iconic executives said was picked up directly by news reporters and covered on the front page of mainstream newspapers like the New York Times.

Pride Comes Before a Fall

But then something happened.  The company began to believe its own media clips and decided that it no longer had to work as hard to compete. Starting around two years ago, it became more interested in counting its money than in developing new products, and it tried to coast on its past successes.

And meanwhile, its top competitor in the phone hardware space, Samsung, suddenly transformed its image from that of a Korean also-ran to a technology visionary.

Samsung’s Galaxy SIII was running rings around the iPhone with a better, larger screen, faster processing times and better camera. Stunningly, it was also beating its rival at marketing, too, with a set of sassy commercials through the fall and holiday shopping seasons last year that made fun of Apple as a product of a slavish older generation.

jmta aapl2 422 300x186 The Rise and Stall of Apple (AAPL)
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And now even Taiwan-based HTC has stolen the march on both mobile communications titans, launching a new phone last week called the HTC One that blows both rivals’ phones out of the water with a gorgeous aluminum uni-body construction, sensational screen, incredible music and camera quality and electronics industry buzz. (I got one last week; it really is amazing.)

Once it dawned on investors that Apple had essentially gone on an “innovation vacation,” they realized that they were paying a premium price for a company that no longer had a technological edge and was also losing the marketing wars as well. Big investors have since abandoned Apple shares to the degree that it has lost almost $300 billion in market capitalization — which is the financial equivalent of the entire market cap of Merck (NYSE:MRK) and Oracle (NASDAQ:ORCL) being wiped out.

A Smushed Apple

Last week, Apple traded in the $300s for the first time since dinosaurs walked the Earth, or 2011. See, they never did need to split the stock after hitting $700.

Sadly, as you can see, the company did this to itself by completely blowing the past entire year-plus of innovation in mobile phones — and they are about to lose their hegemony in tablets as well.

I have argued in the past that Apple made a two-year top back in September, and absolutely every rally to resistance since then has been hammered. The stock is very cheap now, but the narrowing price/earnings multiple reflects the fact that investors have little confidence in the company’s path forward. That’s probably an over-reaction, but frankly the company has done nothing to show that it has any aces up its sleeves.

An Apple take on television might be nice, but I feel that the iPad in combination with the tablet versions of HBO, Showtime, Netflix (NASDAQ:NFLX) and Comcast‘s (NASDAQ:CMCSA) Xfinity have already stolen the march on what we were expecting from a new device that would disintermediate entertainment from the tyranny of the cable operators’ schedules. Time and tech are marching on with Apple as a spectator, so its shares have become the dreaded “source of funds” for investors who see better opportunities.

Analysts Less Bearish Than You’d Think

Now of course it would seem that expectations have been squeezed out of Apple to the extent that it just has to rally when it reports tomorrow after the bell. And it should. But you know, despite the humiliation that it has suffered in the past seven months, analysts are still surprisingly optimistic — and have been for some time. So I still think that there is room for disappointment.

So how has Apple done historically on its earnings dates? Pretty well, actually. The independent analysts at Bespoke Investment Group studied all Apple quarterly reports over the last 10 years. In that time, AAPL has beaten earnings estimates 92.3% of the time, and it has averaged a gain of 1.8% on its past report days. (The analysts use the stock’s next-day change when analyzing its report-day performance, since the company reports after the close.)

When the stock has beaten earnings estimates, it has averaged a one-day gain of 2.3%, Bespoke reports, and when it has missed EPS estimates, it has averaged a one-day decline of 3.6%.  When the stock has opened higher in response to its reports over the last 10 years, it has averaged a decline of 0.6% from the open to the close of trading.  When the stock has opened lower in response to earnings, it has averaged an additional decline of 0.2% from the open to the close of trading, the analysts say.

While AAPL has done well overall on its report days over the last 10 years, more recently the stock has really struggled — especially from the open to the close after it makes its initial move. Since the bull market began in 2009, Bespoke analysts note that AAPL has traded lower during regular trading hours after its initial gap-open 13 out of 16 times, for an average decline of 1.1%.

The stock is now down nearly 50% from its highs last September, and it’s down 13.6% over the last month heading into tomorrow’s report. The Bespoke analysts believe that earnings weakness of the first quarter must have been priced into the stock already, which means that it ought to levitate.

What to Expect Today

Personally, however, I sense that despite its shellacking it is still over-loved. It made its reputation selling unique, high-margin products into an undersupplied market. Now it is selling an increasingly commoditized product into an oversupplied market.

Its managers, who are just starting to be vilified after many years of being lionized, had better be able to pull an iRabbit out of their hats. Otherwise, I am afraid that the stock will continue on its path to being the next Dell (NASDAQ:DELL) or Hewlett Packard (NYSE:HPQ) — once-iconic companies that fell victim to their own success.

If you put a loaded iPod to my head and forced me to make a call, I would guess that earnings would beat the lowered estimates but guidance disappoints. Judging from the market’s reactions to similar scenarios of late, such as Yahoo (NASDAQ:YHOO) and Intel (NASDAQ:INTC), the reaction would likely be initially negative but then turn around and improve. To get the stock really revving again, though, the company would need to announce a real game-changer such as a massive stock buyback program, a big increase in its dividend, a brand new out-of-the-box product idea or the resurrection of Steve Jobs. Failing that, new leadership would do the trick.

The important lesson from all this is that what happened to Apple can happen to any stock, no matter how seemingly bulletproof its growth or products or fame. Stock values are all about fads, and when the fad adds an “e” and fades, there is no story bulls can tell that can will halt the selling until the last true believer dumps his shares.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage, which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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