Apple was a boon to many portfolios over its rally from 2009 through Sept. 2012, when the stock climbed from under $100 to peak at over $700 per share. This year, as it fell to an average of $464 in the third quarter, competition increased and the question of innovation after the loss of its luminary Steve Jobs continued, noted investors voiced varying opinions about the company’s valuation and prospects, and bought and sold shares accordingly.
The largest holder of Apple stock that GuruFocus tracks is David Einhorn’s Greenlight Capital, which owns 2,397,706 shares, representing 0.26% of shares outstanding. The $1.24 billion stake is also 20.3% of Einhorn’s total assets managed.
Einhorn got an early start in Apple, initiating a stake in the second quarter 2010 at an average price of $248.09 per share. The average price for all of his shares was $389 per share, giving him an approximate gain of 33% on the stake.
Einhorn evinced his confidence in the stock by buying over 1 million shares in the first quarter as the stock declined, finally hitting a 52-week low under $390 in April. He left the stake unchanged in the second and third quarters as his patience was rewarded and the price moved up to $477.
While Einhorn was in large part initially drawn to Apple for its growth and financial profile, central to his thesis over the long term is the company’s ability to produce products and services that win loyal customers. Below is a comparison of his comments on the company when he first bought stock and now.
From his second quarter 2010 letter:
Apple Inc. (AAPL)is one of the world’s most successful and innovative technology companies. Over the last few years, the company has transitioned from a niche PC hardware and software provider into a more diversified company with market leadership positions in mobile communications and portable entertainment via its iPod, IPhone, and iPad products and the iTunes service. From 2004 to 2010 revenues have grown about 700% or almost 40% per year. Earnings have grown even faster from $0.38 to an estimated $14.00 per share. AAPL has a fortress balance sheet with more than $40 per share in cash and investments. During the recent downturn, the Partnership established a position at an average price of $248.09 per share, representing 15x this year’s estimated earnings net of cash. While growth over the next few years will certainly be slower than it has been over the last few years, AAPL does not appear to have fully penetrated its market opportunities. Accordingly, the opportunity to invest in this leading company (with a better financial profile than market participants seem to acknowledge) appears attractive at its current multiple. AAPL shares ended the quarter at $251.53 each.
From his third quarter 2013 letter:
“Apple (AAPL) shares advanced from $397 to $477 as earnings estimates stopped falling and the market turned its attention to AAPL’s new products. The newly introduced iPhone 5s gives customers a compelling reason to upgrade. It looks like it will be a hit, and we believe that AAPL will find novel ways to use Touch ID and iBeacon to monetize its user base and ecosystem via new service offerings and apps. AAPL’s current non-hardware e-commerce business (sales from iTunes, AppStore and iBook Store, plus software and services) is $16 billion a year and growing. Not only is it growing faster than Amazon, AAPL makes more money in non-hardware e-commerce alone than Amazon makes in its entire business. That gap will likely widen in AAPL’s favor as AAPL rolls out new offerings and services. We believe that near-term share performance will track the success of the new phones, while the longer-term share price will reflect the market’s eventual understanding of AAPL’s strong ability to earn high-margin and recurring revenue streams.”
Another major shareholder, Carl Icahn, has the largest position of GuruFocus gurus by shares owned. In October he reported to CNBC owning about 4.7 million shares and growing, up from the 3,875,063 he held at the end of the third quarter. His average price was $440 each, already giving him a several million profit on what he called his “most compelling investment.” He also said, “At these values, we think it is still very cheap.”
Several valuation indicators suggest the same. Apple currently trades with a P/E of 13.1, at the lower end of its range in the past 10 years.
Its price to free cash flow at 10.9 and PEG ratio at 0.3 are also close to their historical low ranges. And the Peter Lynch is suggesting the stock is undervalued:
A total of four guru investors in the third quarter established an Apple position: Meridian Funds, Chris Davis, Paul Tudor Jones and Carl Icahn. Nine others increased their holdings, including Ray Dalio, Bill Nygren, Mario Gabelli , David Rolfe and Brian Rogers.
On the other side, five gurus exited their position in Apple: Whitney Tilson’s Kase Capital Management, Leon Cooperman, Jim Simons, Andreas Halvorsen and Stanley Druckenmiller. Eleven others cut their position, including David Tepper, Jeremy Grantham, Jim Chanos and Ronald Muhlenkamp.
Leon Cooperman of Omega Advisors has vacillated on Apple. He sold a stake of about 266,404 shares in the fourth quarter of 2012, buying Qualcomm (NASDAQ:QCOM) and Facebook (NASDAQ:FB). Then, in the second quarter, he sold Facebook and bought 31,000 shares of Apple in the low $400s, but it was not a long-term position.
Cooperman told CNBC in May: "About two weeks ago, I bought a January 400 call, sold a January 460 call and I sold a January 325 put, zero. No cost. Took about $30," he said. "We didn't do enough size unfortunately. We couldn't get it done."
He also said in the interview that he agreed with Icahn that the stock was cheap but believes a better smartphone stock is Qualcomm.
The Baron Funds, led by Ron Baron, cut their holding of Apple by 25,220 shares in the first quarter of 2013, reducing the holding to 11,581 shares in their funds. They have since added under 500 shares.
The firm cited their reason for trimming the stake in the third quarter of 2012 in a letter from the period:
“Lastly, before the end of the quarter, we finally sold Apple, Inc. (AAPL), one of the Fund's most successful investments since inception. This was a tough judgment call that has worked out well, at least on a short-term basis. Our reasons included concerns about the ultimate market cap the market would allow the company to achieve, rising competition from Android devices, the release of the iPhone 5 with a sub-par mapping application and concerns about the ability of the company to hold together its management team in the post-Steve Jobs era (a concern that was validated when the company announced management changes)”
Delphi Management’s Scott Black holds no Apple shares, but engages in a mobile communications play through a stake in Skyworks Solutions (NASDAQ:SWKS), which makes radio-frequency chips used by Qualcomm, Apple (NASDAQ:AAPL) and Samsung (XKRX:005930). In an October Barron’s interview, he commented on why he is avoiding Apple:
“Most big tech companies spend at least 15% to 20% of revenue on research and development. During its halcyon era, Apple spent only 2.3% of revenue on R&D. It could spend so little because Steve Jobs was a genius. I've often called him the Thomas Alva Edison of his day. It doesn't matter that Apple has a staff of 100 Ph.D.s in electrical engineering and computer science. You can't replace Jobs.
A lot of people are reminiscing about the old Apple, and pointing to the company's $130 billion of net cash. But the stock isn't a good value because it's hard to see new products and more growth on the horizon.”
Apple’s new iPhone, which went on the market in September, topped 9 million in sales in the first weekend, breaking the previous record and easing concerns about longevity of demand for the company’s product upgrades. Its 10 days of sales in September made it the U.S. top smartphone seller. Apple’s performance pushed Samsung to second place with a 38% share of the U.S. smartphone market.
For the fourth quarter, Apple reported revenue of $37.5 billion, an increase from $36 billion the same quarter last year. Quarterly net profit was $7.5 billion, or $8.25 per diluted share, almost flat from $8.2 billion, or $8.67 billion in the same periods. It also reported a record 33.8 million iPhones sold for the September quarter, an increase from 26.9 million a year prior. It also sold 100 million more iPads and 300 fewer Macs than the previous year’s quarter.
Ahead of the holidays, Apple on Nov. 12 released its latest new product, the iPad mini with Retina display. The updated iPad has the same number of pixels as the 9.7-inch screen on a 7.90inch screen, with sharp detail, a light design, a power-efficient A7 chip with 64-bit desktop-class architecture, ultrafast wireless, greater LTE cellular connectivity, iOS 7, more features and 475,000 iPad apps available for download.
The new and cheaper smartphone, the iPhone 5C, however, has not been as successful as the 5S. According to analysts at DisplaySearch in October, Apple cut back 5C production by 35% and increased production on the higher-end 5S by 75%.
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