Do Investors Truly Believe in Apple?

by Ben Bajarin   |   July 2nd, 2012

Image: Fool.com

I am not a financial analyst and I don’t do the kind of analysis solely to be used for making short or long term investment calls. I have provided analysis for some financial institutions as a part of their internal analysis but my role as an industry analyst is to study markets, trends, and the industry at large. So I plan on tackling this issue of Apple’s stock fluctuations, and most importantly Wall Streets somewhat hesitant stance toward Apple, from an industry analyst perspective not a financial analyst perspective–since I am not the latter.

Apple’s stock is where it is today because Apple has continued to post quarter after quarter revenue and profit growth. Apple has done this primarily on the back of key fundamentals like vertical integration, their ecosystem, attention to design and user experience, solutions based thinking, and a focus on satisfying customers rather than Wall St. just to name a few. Although Apple’s stock has been relatively consistent on its upward trend there are still interesting fluctuations despite their unchallenged dominance in many product segments over the past 10 years. I know many firms who are bullish on Apple. Yet there seem to always be folks who are hesitant to embrace Apple as a long term growth stock and the question is why?

Too Good to Be True

There is a theory I have heard a number of times that there is a belief that Apple’s growth trend is too good to be true. I suspect that there is some truth to this and that there are investment firms out there with this belief. I believe this is an incorrect perspective, but if the too good to true belief is out there we must be aware of it.

Financial investment firms are in the business of not just predicting what the long term stock potential is but also what other firms may do. If investors, regardless of their long term trust in Apple’s stock, know there are those who may sell shares if there is a hint of bad news, then they have to be ready for a potential sell off. Investors often have to bet with or against the market and the key is to know which and when.

So if the too good to be true theory is partially to blame then it has to be taken into consideration by a firm if they are to make an educated guess on when to bet with or against the market.

Even though the too good to be true theory is wrong in my view, there are bound to be some who cling to it regardless of the facts. However, I feel the root of some hesitancy about Apple’s long term stock is rooted in something deeper.

History is Not on Apple’s Side

I tend to believe that the main thinking affecting investors with a negative sentiment in Apple’s long term future is one of historical perspective. Apple with their closed and vertical model lost to the more open model of Microsoft long ago. So the conventional thinking would be that both Google or Microsoft with their more open platform approach will again rise to dominance if history does repeat itself. There are, however, several things I believe are wrong with the thinking that history will repeat itself.

To see the first error all we need to do is observe many recent events. If the conventional wisdom is that open always wins then those open platform players just committed suicide. Microsoft with Surface and to some degree Google with the Nexus program, but more specifically what they may do with Motorola, are both a step in the vertical direction. In fact if you read between the lines from statements from both Microsoft and Google around the importance of tightly integrated hardware with software, then you will observe that those statements are in fact a validation that Apple’s vertical model is not only the right way forward but the superior way forward.

The other flaw in focusing only on historical perspective is that it does not take into account that the market has changed drastically. Specifically, the market for personal computers has matured. To use historical perspective to compare an immature market with a mature market is nearly impossible. The buying psychology of customers in a mature market vs an immature market are fundamentally different.

In fact I would argue that for most of the time when Microsoft dominated the industry, the mass market consumers were not the main purchasers of computers but rather corporations and institutions were. Therefore in the 90s specifically, corporate IT were the customers where in todays markets end consumers are the customers and they buy fundamentally differently than IT historically has.

The market is also significantly larger than when Microsoft was dominant. Nearly every person on the planet will someday be a candidate for a personal computer of some kind. Which means that there is still a tremendous amount of growth ahead of us and my conviction is that Apple is in this for the long haul.

For these reasons, it is impossible to use historical perspective or the argument that history is not on Apple’s side as a reason to be bearish.

Where Do We Go From Here?

The biggest question in my mind, which needs further analysis and thought is whether or not there can be more than one leader in the industry at a time. It is clear that right now Apple is setting the trends and to a degree dictating where we are headed with personal computing.

When a market is maturing or even in the process of becoming post mature there tends to be a leader responsible for standardizing a solution. But in mature markets of other industries like packaged goods, consumer electronics, automobiles, etc., we don’t typically identify a clear leader, rather each company charts out a course and stays with it.

Of course the market for personal computers may be very difficult to compare with other mature markets but if we were to find one that is closest I would say it is automobiles. I don’t have an answer, or a fully formed opinion as to whether the personal computing industry can have multiple leaders but I am sure that topic will make for good discussion.

If we can make the case that there can only be one, or at the least very few, leading a segment then I believe we can confidently make a strong case that two decades of leadership–or more– is not out of Apple’s grasp. This and the fact that there is so much headroom for growth in personal computers globally.

When you add market growth potential, with Apple’s fundamentals, the vertical trend, and their constant success in customer satisfaction, it is my opinion that it is hard to bet against them.

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Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio
  • Grwisher

    One more possible reason – Apple is a very complex entity with many moving parts. Therefore it is very hard for the average investor to understand and keep track of its true status. Because of this complexity, it makes it very easy for the press to discredit AAPL (to get clicks) which can drive the stock drastically lower from time to time. A recent example of this was an article stating that the iPhone carrier subsidy was in jeopardy. Since I spend a substantial amount of time studying Apple, I was inclined to discount that story. However, evidently a large number of other investors seemed to believe it and the stock tanked. In the past the impending death of Steve Jobs was a favorite method of getting clicks which resulted in driving the stock down.

    As an AAPL investor since 2007, I can testify that investing in Apple is an adult ride. If you have a substantial percentage of your holdings in Apple, you can go from an extreme emotional high down to the point that you are almost suicidal. For this reason most of my friends don’t own it and the ones that have couldn’t stand the volatility and go out of it.

    • benbajarin

      I have thought of that as well but the idea that the press (who are often misguided and wrong themselves) have as much power to drive a stock down is somewhat frightening.

      I hope that more investors gain valuable insight to the fundamentals that position Apple strongly for the future so they know when the press is simply chasing page views.

      This again speaks to things that need to be factored in as to when to bet a certain way so I appreciate your insight there.

      As Steve, who wrote a column pointing out a few others things today and taking my article a little further points out, Apple’s P/E ratio is odd specifically that it makes no sense that a dollar of Google earnings is worth 24% more than a buck of Apple profit.

      Thanks again for the thoughts I really appreciate it.

      • grwisher

        It is quite possible that the press is deliberately trying to drive the stock down (or up). However I am 100% certain that the press is definitely trying to get clicks (readership), and that often does affect AAPL’s stock price.

        • mhikl

          Good points, grwisher. There are Apple haters and investors with agenda. Not much we can do with haters and responding is only providing them with more click but with volatility in Apple stock there does seem to be patterns that the individual investor might use to his/er advantage.

          • steve_wildstrom

            Like most big, publicly traded companies, Apple is owned mostly by institutional investors (67% according to NASDAQ.) One can only hope they are responding to more than media reports.

          • mhikl

            Steve, I have read that institutional investors have to take their profits, probably before reporting time to their holders, so when the Apple share is rising or seems it might have peaked is the time to sell. Then I suspect they buy back when Apple drops substantially which can garner more shares. They lose nothing by selling and what ever the Apple stock price is at reinvesting, they are starting their investing cycle over again.

          • Grwisher

            (1) AAPL’s average daily volume is 15.15 million shares out of 935.06 million shares outstanding, which means that, on average, only 1.62% of the shares outstanding are traded every day. Therefore it does not take much of a story (true or not) to affect the price of the stock.

            (2) I wouldn’t put a lot of faith in what “stock market experts” (as I would assume institutional investors fall in that category) think about Apple. I have heard some pretty crazy stuff from “stock market experts” on TV shows like Squawk Box and Fast Money. I have heard some pretty decent advice from them as well.

      • Grwisher

        Regarding your comment:“Apple’s P/E ratio is odd specifically that it makes no sense that a dollar of Google earnings is worth 24% more than a buck of Apple profit.”

        This makes my point exactly. From my original comment: “Apple is a very complex entity with many moving parts. Therefore it is very hard for the average investor to understand and keep track of its true status.”

        Google is a much simpler company than Apple. Let me qualify that statement – it is much easier to understand how Google makes money than to understand how Apple makes money. While Google is complex because it is always experimenting with things like self driving cars, computerized glasses, etc., Google makes the majority of its profit from search. Apple has a multitude of profit centers: desktops, notebooks, iPods, iPhones, iPads, Apps, iTunes, Apple stores, etc. Almost everyone uses Google search and therefore they know the value of the product and understand first hand how Google is profitable. It is just harder to understand the profit potential of Apple’s complex structure and that creates uncertainty.

        • benbajarin

          That is a good explanation. That makes total sense but what I would wonder is why investors don’t look at Apple’s businesses (i.e hardware business, software business, services business, etc) as three separate business to start with then factor their relationship + value together?

          In this case you could simplify their complexity by isolating key parts at least as a starting point. Then factor in those individual parts to the whole for the bigger long term picture.

          Your point does make total sense, but given that vertical is the trend this is going to have to be a model investors wrestle with because they will need it for Microsoft and Google as well in the future (at least to a degree.)

  • mhikl

    Holy cow, Ben. What a knockout piece. Point after point, punch after punch such that it took three coffee warmups, multiple rest periods to catch my breath and reflect, and a trip to the patio to oxygenate the little grey cells. A Mozartian symphony of reflection here, bud.

    Sometimes gut sense and clear thinking outside the box trump experts tied to false habit (think Galileo vs the vatican, Ignaz Semmelweis against the medical system 1847 & other such original thinkers).

    Galileo was locked up and Ignaz went insane. It is the brave soul who ventures to speak in truths against the nuts who rule our world.

    • benbajarin

      Thank you for the kind words. And thanks specifically for suggesting I tackle this topic. Please feel free to reach out to me with other things you would like to see my tackle.

      Sometimes I just need a little inspiration :)

  • Beckmania

    Interesting post! With regards to the piece about history repeating itself – I hear this a lot (I work in the mobile industry) and I don’t agree with it either. Developers want to write software once (minimize costs), and have it run in as many places as possible (maximize revenue via a large market). Windows PC gave that to developers bc Microsoft was successful in getting OEMs to build STANDARDIZED hardware. You write software for Windows, and it runs on 90% of the world’s computers. Apple computers were a tiny piece of the market – Apple’s mistake was not getting a bigger market share for developers to get access to. None of this is true in the mobile version of the story. iOS now DOES have more than enough of a market to make it compelling for developers, while Windows does not, and Android only appears to, but also doesn’t (bc fragmentation turns the Android ecosystem into ‘many islands of users’ that all require time and resources to support. So I would argue, in fact, that in addition to the points made in the article, at this stage, Apple is playing the role of Microsoft this time around in terms of providing developers what they want and need. The fact that that the user experience is THAT MUCH BETTER is a nice bonus:)

    • benbajarin

      Thanks for the perspective I appreciate your thoughts. I also agree with you that Apple is playing the role of MSFT. Apple has even played a role in standardizing mobile hardware if you think about it. Although there is platform fragmentation nearly all popular mainstream smartphones are screen slates with no physical keyboard. Apple has influenced this point of mobile hardware.

      I suspect they will do the same with tablets as the iPad becomes to the tablet standard.

      • Beckmania

        True, most hardware LOOKS the same in terms of having a big screen with no keyboard, but fragmentation can still wreak havoc within that framework – OEMs all change the Android APIs, how they work etc, and have tons of different screen sizes and resolutions that still make it very challenging to develop for Android……should be interesting to see if Google tackles this successfully, but they are ‘fragmentation deniers’:) I think it’s still why developer’s overwhelmingly choose iOS as their initial platform…..

  • Brian

    How about the overall history of technology companies? Kodak was once unstoppable. Tech companies do not have the moat that a consumer products company like P&G has. Technology and consumers are constantly changing. Not like with razors where you can keep adding blades and aloe strips to keep up.

    So far, Apple has made great computers, a phone, an mp3 sort of like a phone and another thing like a phone only bigger (ipad). They are all great products. But what is the next thing? Will it make as much profit as the iphone and ipad? How hard is it for competitors to copy eventually? What happens when the phone type device is no longer it? They have all the pieces to innovate with the people, manufacturing relationships, etc, but it is hard to deliver for long stretches. It is hard to keep up with the changes.

    Apple should do great for the next several years. Beyond that is pure speculation.

    • FalKirk

      “Apple should do great for the next several years. Beyond that is pure speculation.”-Brian

      You can say the same about virtually every company. You don’t measure a company’s valuation in black and white terms or in possibilities. You measure it in probabilities. If you’re going to use: “Beyond the next several years, everything is pure speculation” as the foundation for your analysis then virtually no analysis is possible.

      “…what is the next thing (for Apple)?”-Brian

      I believe that the “next thing” is the iPad. What’s that you say? The iPad is already here? True enough. But the iPad is just over two years of age and its already well on its way to initiating a computing renaissance.

      Supposition, you say? Speculation, you say? Analysis, I say.

      One of the keys to investing is discerning the trends before others do. The evidence for a computing re-birth is all around us. Knowing what should be obvious to all, but which remains unobserved by most, is the surest way to change a bet on the future into an investment in the future.

      • Brian

        Thanks FalKirk. I think we agree on some things here, but I like talking about this stuff, so here is a reply.

        “You can say the same about virtually every company. You don’t measure a company’s valuation in black and white terms or in possibilities. You measure it in probabilities.”

        Agreed, it is probabilities that a company can maintain a durable competitive advantage. But what is more likely – Coca Cola will be around in 25 years or Apple? A railroad company or Apple? P&G or Apple? Tech companies simply do not stick around as long as other groups of companies. I can say pretty confidently that men will have hair on their face and that razor blades will be around in 25 years. I don’t know about what computers will look like exactly and whatever product Apple is making at the time. People over-estimate the staying power of a tech company. They can make a lot of money, but it is hard to stick around for long periods of time (unless they change their model like IBM). But for every IBM, there are a lot of 3Ms, P&Gs, Coke, Pepsi, etc.

        “One of the keys to investing is discerning the trends before others do.”

        Well, that might be the key for you, not necessarily every investor. You could also just watch companies that have a very high probability of being around for a long time and wait for their stock to go down. This is why Buffett is not buying Apple. Not because they can’t make money right now, but it is very unknown whether they have staying power based on the tech segment.

        • FalKirk

          “(W)hat is more likely – Coca Cola will be around in 25 years or Apple? A railroad company or Apple? P&G or Apple?”-Brian

          Is that really the question? I don’t know Coca Cola’s numbers but I suspect that Apple is going to make more in the next year than Coca Cola is going to make in the next five years. Railroads? Seriously? They’re a relic. They’re surviving, not thriving. I won’t speak to P&G.

          “Tech companies simply do not stick around as long as other groups of companies.”-Brian

          Really? Says who. IBM’s been around for 100 years. We live in the age of tech not steam or steel or rails. This is tech’s time. The turmoil and turnover is a sign of a healthy sector. Tech will survive. Which companies within tech will survive and thrive is a different question altogether.

          You seem to put a lot of stock in longevity. But longevity is not a guarantor of profits. The market pays an added premium for added risk. If you’re just looking for longevity, then you should invest in CD’s or savings bonds, not stocks.

          • Brian

            “I don’t know Coca Cola’s numbers but I suspect that Apple is going to make more in the next year than Coca Cola is going to make in the next five years.”

            Agreed…you don’t know the numbers.

            “Which companies within tech will survive and thrive is a different question altogether.”

            We agree! But I thought that was exactly the question. “Do Investors believe in Apple?” not “Do investors believe in Technology?” We can agree that technology is here to stay.

            “The turmoil and turnover is a sign of a healthy sector.”

            Agreed, great for the sector, hard for individual companies.

            “If you’re just looking for longevity, then you should invest in CD’s or savings bonds, not stocks.”
            We don’t agree here. They don’t keep up with inflation and the return is low.

  • W. van Dam

    “[...] then you will observe that those statements are in fact a validation that Apple’s vertical model is not only the right way forward but the superior way forward.”
    At this time, yes.

    • W. van Dam

      Sorry for the double post. I hit ‘post’ early by accident, before actually finishing the post and comments.

      “The biggest question in my mind, which needs further analysis and thought is whether or not there can be more than one leader in the industry at a time.”

      Yes and no.

      “But in mature markets of other industries like packaged goods, consumer electronics, automobiles, etc., we don’t typically identify a clear leader, rather each company charts out a course and stays with it.”
      And there you have your answer. In those mature markets each company is typically a leader in its own chosen strategic path. What you get are claims that go like ‘leading brand in particular product type for specific demographic in geographic regions x and y’.

      You also already make the distinction that is quite visible in this industry:
      Microsoft and co have their roots in the corporate world and the early (majority) adopters of computers. They also have a stronger footing in the lower end of the consumer market, just like Android. Apple has in recent years started to disrupted MS and co in the higher segments of the consumer market.

  • Nine Yarder

    Thank you Ben. Investors will believe in Apple when Apple shows them the money. I would argue that Apple has ignored the investment community compared to for example MS. That will change at the point in time when Apple has so much cash that they will pay out at least 50% of profit in the form of dividends. In two years Apple could have a quarter Trillion dollars in cash. They could be earning $40 per share after tax just in the U.S. If they pay out 100% of the U.S. after tax earnings and hold back the overseas ( U.S. untaxed) income, then at a 3% dividend rate that implies $1,300 a share. And at that point they don’t have to grow their revs at all, they will be purely a cash machine with better credit than the U.S. government. What’s not to love about that?

  • Canucker

    The issue with companies with long series of hits like Apple is that most people treat it as a probability problem. They see the continual climb and performance as a series of heads in a coin flip. The downsides look although they are accumulating whereas upsides are discounted. For example, there is significant stickiness due to ecosystem buy-in. At some point, the cost to switch is simply too high or too laborious. People become accustomed to doing things in a particular way such that alternatives do not look fresh, they look complicated. In essence, companies like Apple, Google and Microsoft are carving up the population into camps that are relatively self-contained. Each makes it easier to stay within their camp. This explains why Google is building its own tablet as well as Chrome notebooks, whereas Microsoft is building Surface. Neither can afford to be at the mercy of poorly executed hardware “partners” who are looking at short term horizons. It’s all about tying in people. Whether this is good or not is not relevant, Apple has shown them all where the gold is to be found and, of course, they are following the money.