Apple’s (AAPL) earnings are creating quite a buzz. I don’t have much to say about the company’s results or its merit as an investment (as I’ve noted previously, I simply don’t believe that I have a firm enough understanding on how sustainable their business is). However, I want to note a few things (mostly market participant reactions) that I think are worth talking about.
The first is this notion of the “miss” coming from the financial media; my belief is that they really don’t know what they’re talking about when results come across the tape — and when they can’t explain equity movements with EPS (which Apple beat) or revenue (a slight miss) versus the street’s estimates, that leaves them guessing. A great example is the iPhone number that’s being pointed to: The company sold 47.8 million devices, compared to a consensus on the street of 48.3 million. For anybody interested in the math, that’s a miss of about 1% — and according to places like MSN Money, is the rationale for a $40 billion decline in the company’s valuation.
The next thing to address are the questions that are getting louder: what about competition? Where’s the next big product? Is this growth sustainable? As I noted in my article, “As Goes the Stock, So Goes the News,” the financial media is great at keeping their mouth shut when the stock is rushing higher — yet will fling against the wall at any possible explanation for a company’s demise if price movements suggest that it is around the corner. People are notoriously bad at staying level-headed, and it’s laughable with hindsight: A few months ago this stock was assuredly going to be worth $1 trillion in no time — and now they want Tim Cook’s head on stick.
If you own Apple, you MUST be asking yourself questions about the sustainability of the company’s earnings — a measure that has more than quadrupled in three years’ time on its way to more than $40 billion; if you can’t explain why this is sustainable — why this company will be able to hold onto a position that has been subject to wide changes in the recent past — the price/earnings ratio suddenly becomes quite useless. The intelligent investor will become more demanding in their questions as the stock becomes richer — the increase alone is NOT an answer.
Analysts were at a race to the top when Apple was moving higher (with some pointing above $1,000 per share); now, they will likely engage in a race to downgrade. As I’ve noted previously, they are in a game of guessing short term price movements. What the analyst community has to say, at $700 or $450, is of little (if any) importance to someone who thinks like an owner. If you are in the business of predicting quarterly iPad, iPhone, and Mac shipments, you belong right along with the aforementioned analysts (have fun trying to outguess them).
For the long-term investor, the decline in the share price is irrelevant; the answer to the aforementioned questions (and what may be gleaned from this quarter’s results) is the critical component in the equation for determining Apple’s intrinsic value. If you are only starting to ask yourself these questions after the stock’s declined, you are well behind the eight ball.
For me, Apple remains in the “too hard” pile (for now — if we get to a level where I’m paying a low single-digit multiple ex-cash, I would take a much closer look than I have in the past). I would be interested in hearing others’ thoughts on the sustainability of Apple’s business.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.