If you want a stock to go up, it helps to have a lot of folks predicting it will go down. This creates a “wall of worry” that you can trade against, willing sellers who can make a sensible market.
Since I warned about Apple Inc. (NASDAQ:AAPL) early this month, some Apple stockholders were able to take advantage of this wall. Now, however, shares are up a mere 3.18%, against a general NASDAQ gain of 3.33%.
Unfortunately, AAPL stock price has decoupled from the company’s fundamentals. When Apple reports earnings on August 1, analysts are hoping it will earn $1.61 per share on revenue of $44.67 billion. Those numbers sound great, until you realize that a year ago the company earned $1.42 per share on revenue of $42.36 billion. The stock’s gain of 55% in value is much greater than the company’s improved performance would dictate.
The Law of Big Numbers
At its July 31 current market cap of $775 billion, Apple is trading at about 17 times earnings. A year ago, it was at about 15 times earnings. Much of the gain in the shares is simply multiple expansion, people paying more for the same income stream.
For years, Apple has been among the most beloved stocks in the market. Even at these prices, 28 of its 45 analysts are still screaming buy.
The problem is that big numbers are harder to push up than smaller numbers, and Apple today is nothing but big numbers. Sales peaked in fiscal 2015 at $233 billion, and will be hard pressed to beat that for 2017. Apple has kept the shares rising through stock repurchases, and by raising the dividend, now at 63 cents per share.
As I have written repeatedly, these are the moves of a mature company, not a growth company. News headlines now are about AAPL
cozying up to politicians or charging $1,200 for an iPhone.
Love Them Rumors
Rumors about the iPhone 8, due out this fall, focus on incremental improvements like facial recognition, the end of the Home button, an edge-to-edge display, as well as a faster chip. Despite the breathlessness with which this is reported, these are incremental changes. The iPhone is a mature technology.
Any hope for real gains will be based on the Apple Watch, which will likely be shown alongside the new iPhone this fall, and if the $300 product could provide serious medical tests, something Apple has been working on, it could indeed be a huge hit. But, that’s not what is expected.
Apple’s premium pricing makes it the market’s Cadillac, and creates an ecosystem willing to pay for services. Service revenue is the fastest-growing part of Apple’s revenues. But, as I wrote early in July, that depends on Apple growing its market share, which remains in the low single-digits globally because of the iPhone’s high price, which it appears is only going to go higher.
The Bottom Line
When companies stop growing, they start to die. When companies become institutions, they tend to stop growing.
The best symbol of Apple’s status today is its spaceship campus, a saucer-shaped crystal palace (that would not have been out of place in the 1950s) in terms of the corporate lifestyle it creates. Apple has set itself apart from the rest of the tech world, an island unto itself.
AAPL’s moves to increase the dividend, to keep repurchasing shares, and to placate the political class are also the moves of a mature company. But, what comes after maturity is senility. In a corporate sense, this means a stale organization, a devotion to internal politics, a divorce from the market’s realities.
That’s why I’m out of AAPL stock, even though my worry is why your Apple shares keep going up.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
