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Stock Ticker: Apple

Stock Ticker: Apple

Thu 24 Jan 2013 1:24pm GMT / 8:24am EST / 5:24am PST
HardwareFinancial

Record results, but a huge drop in value. Why doesn't Wall Street love the other Big Apple?

Last night, after the closing bell on Wall Street, Apple announced its results for the quarter ended December 29th. The company - unarguably the most commercially successful technology company of the past decade, whatever your personal stance on its products may be - announced record revenue and profits, record sales of iPhones and record sales of iPads. Profits didn't grow vastly, remaining largely flat at just over $13 billion, but revenue shot up to $54.5 billion - $8 billion year on year growth, and a fairly stunning achievement for a company which only three years ago was boasting about making $50 billion a year. Now it manages that in 14 weeks.

Reaction on the markets was swift. Apple lost 10% of its value in after-hours trading.

"Apple's share price has been sliding fairly consistently since it peaked at over $700 in mid-September"

Wait, what?

Yes, that's right - record figures for unit sales of the company's key categories (weak sales of Mac computers were a minor low spot, partially attributable to serious supply chain problems with the new iMac models which launched during the quarter), record turnover and record profits, all coming off the back of a year-ago quarter which was itself a remarkable record-breaker, drove Apple's share price down. In fact, Apple's share price has been sliding fairly consistently since it peaked at over $700 in mid-September, and this week it dipped below $500 for the first time since last February. You might reasonably have expected solid numbers to halt the decline; if anything, they accelerated it, at least temporarily.

1

So, what's going on here? Plenty of commentators have interpreted these figures as showing that Apple is hitting a wall in its growth. If you buy into the idea that the stock market reveals hidden wisdom in its movements, that's a fair assessment. A company which loses nearly 30% of its value in the space of a few months must have some underlying problem, or be facing some immense challenge which the market does not believe it can overcome. Right?

Well, maybe. The problem is that the stock market doesn't really move based on keen insight or solid fact - it is a beast driven more by sentiment and by the twin handmaidens of rumour and speculation. What Apple's precipitous drop means isn't that Apple necessarily faces its doom, it's that the market doesn't feel good about Apple - or worse, that it's not sure what to feel about Apple, since unpredictability is even worse than a fact-based negative outlook to a large extent.

"That's the kind of storyline investors can understand, and it's the kind of storyline that leads them to try to offload shares"

Recent months have seen a number of incidents which are, in the final analysis, of much more relevance to Apple's stock price (and the sentiment around the company) than they are to Apple's business. First, of course, there was the Apple Maps fiasco, which doesn't seem to have harmed iPhone 5 sales or iOS 6 installation rates, but reflected negatively on the company's image, at least in tech circles. Next, there was the negative response to the iPad Mini in the tech press, which was reflected in the financial press - although again, not in the consumer response to the device, which has been extremely popular. Finally, the past few weeks have seen whirling speculation about Apple missing some rather arbitrary financial targets in its results, fuelled in part by an unsourced, unverified but widely reported story about iPhone 5 component orders being halved.

Add those things together, and you start to see a negative storyline forming around Apple - a company that's lost its shine, that's releasing products that aren't up to the quality or innovation of its former glories, and which is finally being punished with slack demand for its flagship iPhone 5. That's the kind of storyline investors can understand, and it's the kind of storyline that leads them to try to offload shares. Many of them bought Apple at well below $500 and will be happy to make money at that level, if they fear being exposed to significant risk by hanging on to Apple stock for too long. In a sense, they might even feel like what's happening now is just the hangover after the party - after all, recent years have brought Apple from stock market irrelevance to being among the world's biggest companies, vastly outperforming its market, the NASDAQ, until recent months dragged it back down to earth.

2

The problem, from the point of view of anyone who's actually trying to get a handle on where the tech market is going - a topic of some concern to anyone developing mobile and tablet games, to give a relevant example - is that the narrative the stock market has acted upon isn't really based on very many facts. As it does so often, the stock market is jumping at shadows. Look at Apple Maps and the iPad Mini - both derided in the tech press, both presented as examples of things "Steve would never have allowed" and added to the burgeoning narrative of a rudderless Apple failing to match up to the exacting standards of its late lamented founder and CEO, whose part in launching utter rubbish like MobileMe, iTunes Ping or the abortive iTunes Phone co-developed with Motorola is conveniently forgotten. Both of those products drove the share price down, yet it's clear that neither of them had a negative effect on actual revenue and profits, with the iPad Mini clearly driving holiday season revenue and Apple Maps more speculatively being attributed with helping the company to grow sales in China and other territories where Google's maps offering isn't very good. In other words, the markets got the one thing wrong they're expected to get right; they totally misread how a company's products would perform with consumers, preferring to be sucked in by the misgivings of the niche tech press.

"Who benefits from such a story being dropped into the press and circulated around the world? Well, in the world of stock trading, anyone who's got an option to sell Apple stock at over $500 in late January"

Of course, there's another question worth asking here, albeit a deeply cynical one. If the market is jumping at shadows, who's casting the shadows? That's a question worth asking with regard to Apple's other sentiment woes - especially the story about the reduced component orders for iPhone 5 handsets, which emerged, lacking any kind of source, in a small industry-watching publication before being picked up and vastly trumpeted in the financial press, including the Wall Street Journal (which should really, really have known better). Days later, there had been no confirmation and no more sources had come forward, and most publications quietly dropped the story about component orders being halved - but stuck to the narrative it had generated, namely that iPhone 5 demand is weak, even in the face of US carrier Verizon coming out with some solid, validated figures proving quite the opposite.

Follow the money. Who benefits from such a story being dropped into the press and circulated around the world? Well, in the world of stock trading, anyone who's got an option to sell Apple stock at over $500 in late January - which turns out to be quite a lot of people, with market commentators noting that the sheer volume of such options on the market suggests that quite a number of large investors and institutional traders had a direct interest in making sure that AAPL stock went below $500 around now. Stock manipulation, of course, is of dubious legality, but with the markets already nervous about Apple's meteoric rise and the abundance of "it hasn't been the same since Steve died" opinion pieces influencing the narrative, dropping some minor bombshells regarding the iPhone supply chain (truthful or otherwise) into the right ears would have been a huge temptation for traders sitting on such options. The lower Apple goes by the date their options come up, the more money they make.

This is the problem, in many regards, with a stock like Apple. The company is simply so huge that it's stock movements have become disconnected from its operations, and hooked up instead to a complex network of high-stakes gambles, bluffs and double-bluffs. Consider this; the 10% drop in Apple's share price after hours last night wiped enough money from its valuation to buy almost every one of its rivals in the mobile phone business, Samsung aside, twice over. Many people lost money when those shares moved, but many people made money, too. It's tough to believe that many of those people, with such sums at stake, would have been entirely passive in their involvement.

In a sense, then, Apple's sheer size compared to its rivals makes this next graph irrelevant, but it does still give us some idea of how the markets are thinking.

3

It should come as no surprise that despite the downturn over the past few months, Apple is actually vastly outperforming both of its closest US rivals, Microsoft and Google, over the long term. Google, however, is clearly seen to be backing a winner in the Android operating system - even if the only company that actually seems to be making serious headway from it in the mobile market is Samsung, whose share price we can't show here (we don't have access to Korean exchange data from our provider, so we can't plug it into our spreadsheets), but which has grown by a comfortable 45% over the same 12 month period, and would therefore be the top performer on this graph. Microsoft, however, is a tougher sell to investors. The response to Windows 8 has been muted at best, Windows Phone 8 is beloved of a small band of devotees and utterly unknown to almost everyone else, and few outside the same devoted band would argue that the firm's Surface tablets present even the remotest challenge to the iPad's dominance of the tablet market.

The reason this graph can't be taken at face value, though, is because of the sheer difference in the numbers it represents. In terms of overall value (market capitalisation), Google and Microsoft added together just about sum up to Apple's value. In terms of revenue, there's no contest - Apple turned over more money last quarter than Google makes in an entire year, and its annual revenue is more than double that of Microsoft. As for profit, again, it comfortably doubles Microsoft's take, and Google isn't even in the same ball park - Apple made more than four times Google's net income last quarter.

"In terms of overall value, Google and Microsoft added together just about sum up to Apple's value"

So what's the take-away for companies or individuals developing games for mobile and tablet platforms, and trying to figure out if there's anything to the claims that Apple has "disappointed" or worse, "hit a wall"? Simply this - Apple's fundamentals are incredibly sound, the company's sales are still growing solidly, and there are 75 million more iOS devices in people's hands now than there were three months ago. That's a lot of new potential customers. For investors, though, caveat emptor. Apple will probably grow again, simply because there's no evidence that the company's product growth is slowing or has been compromised, but it's going to take a while for the negative sentiment around the firm to dissipate - and as is inevitable with a stock this valuable in a market as volatile as technology, there are some very big sharks circling this gambling table.

Finally, I couldn't resist running this last set of numbers, even though the resulting graph made me a little sad. Steve Jobs was a die-hard devotee of Sony, and his dream through the early years of Apple was to model his company on the Japanese giant, whose product design, quality, work practices and market leadership he admired hugely. Today, even the recent downturn in the value of the Yen, which has bought Japanese exporters some breathing room, can't disguise Sony's continuing market decline - a decline for which Apple itself is heavily responsible. Apple's graph can be dismissed in part as a reflection of sentiment rather than reality. Sony's cannot.

4

17 Comments

Brilliant article. But you could have just stuck this line up there and left it at that:

"The problem is that the stock market doesn't really move based on keen insight or solid fact - it is a beast driven more by sentiment and by the twin handmaidens of rumour and speculation."

Point is, Apple themselves won't care TOO much at this point about the value of its shares - they're too busy making record profits. If hedge funds and speculators want to drive the market and make money, they'll do that irrespective. Apple needs to worry when its profits start to fall significantly - until then, they can continue to steer the course they're taking. God knows, it's the right one (for the company).

Posted:A year ago

#1

Bruce Everiss
Marketing Consultant

1,716 598 0.3
Apple's PE ratio is currently 10.44, which is utterly ridiculous.
This and their cash reserves make buying their shares a no-brainer.
And last night Tim Cook was dropping very heavy hints about Apple TV and about planned obsolescence.
It is obvious that Apple intend to own the living room, using the same techniques they have applied to previous successful areas. If/when they pull this one off it will dwarf their current success.

Posted:A year ago

#2

Adam Campbell
Associate Producer

1,118 888 0.8
Popular Comment
Stocks & shares will forever be a controversial thing given their 'virtual' and subjective nature.

However, I think this does reflect some of the realities. Apple may have been overconfident on the iPhone 5 and that's despite its success. There are also questions over the future and increased competition in all markets. Their dominance probably isn't sustainable with the same business model and somewhat outdated OS/features they have carried for so long.

A return to innovation at the forefront, a more diverse range of products and prices and perhaps even adopting more industry standards could give them a big boost. I can't say there's an awful lot to worry about in the immediate future though but consumers always move on eventually and Apple is not immune.

Posted:A year ago

#3
Popular Comment
Adam - that's basically the narrative of the tech and financial press, but it doesn't match up with facts on the ground. Sure, "this won't work forever" is a fair point, but in the short to medium term, the iPhone 5 is selling better than any previous iPhone, the iPad is selling faster than ever before, and the iPhone 4/S is making huge inroads into the low-cost phone market in a way that Apple never managed before. They're growing vastly in developing markets like China, which is a big indicator as well - and it's worth noting that Apple exceeded all its own targets for unit sales and revenue, missing only those set by third-party analysts with no real insight into the company's internal dealings.

None of that is to say that Apple is sustainable forever - it's obvious that it's not - but I'm not seeing anything in the facts (as distinct from market speculation) to suggest that their downturn is coming in the near future. As for the "return to innovation"; I get that people are excited to see the Next Big Thing, but Apple has created and dominated three major product categories in the past ten years (iPod, iPhone, iPad), and it's not unreasonable to expect a few years gap between such major market-changing devices. I also feel like Apple is being held to a standard here that few other companies in the same sector are expected to answer to; why isn't anyone pounding on Samsung's door demanding that they come up with a gigantic, innovative, market-changing product, or face imminent collapse? Yet Apple - vastly more profitable than Samsung, and still commanding a dominant share of the top end of the market - is seen as being "vulnerable" unless it releases some kind of messianic market-changer every five minutes. That makes very little sense to me. It fits with a narrative that the market is following, that makes sense to the tech press and that conveniently benefits many of those gambling heavily on Apple's stock, but it doesn't actually fit with the facts.

That stuff will become true some day, and some snappy company will pop up with something innovative and unexpected that bites a vast chunk out of the Apple - but not this quarter, or next quarter, or the one after that.

Posted:A year ago

#4

Daniel Hughes
Studying PhD Literary Modernism

410 455 1.1
Great article Rob, I've particularly enjoyed these stock ticker articles in the past. It'll be interesting to see how the market responds to Apple's announcements in the next few months, and whether the market perceives more iterative products to be a sign of imminent doom (which won't reflect consumer reality), or if Apple's stock can rise higher than ever following an unveil of the Next Big Thing.

While I don't enjoy Apple's products personally, I can't deny they're a fascinating company to watch.

Posted:A year ago

#5

Steve Peterson
West Coast Editor

96 58 0.6
Spot on analysis, Rob. Apple's CEO Tim Cook also noted in his remarks that they would have done much better last quarter but for supply constraints on the iPad Mini (which is still backlogged) and their new Mac models. Even with all their manufacturing muscle, they can't build things fast enough. It's also worth noting that 121 million people visited an Apple store last quarter (up from 110 million in the previous year's quarter). That is an incredibly valuable resource.

I'll worry about Apple sales of iPhones and iPads start dropping for a couple of quarters in a row. Even then, they can take their enormous pile of cash and buy their way into a new, profitable business. I still expect Apple TV to become a major category at some point, which could easily rival or overtake any of their other categories.

Posted:A year ago

#6

David Lee
Chief Concepticator

13 3 0.2
Interesting article. Fran's point above about the universal truths of the stock market is well taken. The stock market is not about current performance or fundamentals. It's more about a combination of magic beans and complex bets that can reward gamblers if a company's stock goes down (as Rob noted) as well as up. While Apple is still HUGELY profitable, they're no longer viewed as infallible and without Jobs they've lost their magic pitchman. They're also under stronger competition these days, so there is some validity in fearing that future profits may be on a negative trend as a percentage of revenue.

But mostly I suspect it's because the rentier class no longer believes in the potential of an incredible return on their Apple stock investment (a merely good return no longer being of interest these days). Apple is a very strong company but they no longer have the promise of magic beans. An excellent milk cow doesn't have the same appeal.

Posted:A year ago

#7
Stock changes are about future, potential growth - relative to your current position. It is not about results. So many times have I heard of companies posting poor results, only for the stock to shoot up - on potential of "better" results in the future.

The fear with Apple, is its growth may have peaked - nothing more. Its obviously insanely profitable, and they have so much cash reserves - they could outperform most companies *just* by investing that cash in a bank, and taking the interest.

Posted:A year ago

#8

Yiannis Koumoutzelis
Founder & Creative Director

356 181 0.5
interesting article and indeed revenue is vastly different and all that.
however, i do not think that wall street really cares about that. yes. wall street is about making huge money of course. but in its core, deep in their psyche investors, especially in a world where technology is king, care about supporting innovation. iphone and ipad were innovative. however time and again apple has shown clearly, that it is all about milking than innovating. investors want growth. and a company that has hit the ceiling is of not much interest. MS had a 24% revenue increase last year. so what? it is interesting however how investment works in other tech sectors. i was reading today about a huge investment stream towards 3d printing. i know of 3d printing for more than a decade, but recently it is spiking so much it has almost become mainstream! it went even all out on kickstarter with great success! some years back it was social gaming, before that motion gaming, this year it is PC gaming, it is not just about numbers, but also about hype and fads and all that cool stuff that make the money world go round. sit back and relax! :) don't forget your pop corn!

Edited 2 times. Last edit by Yiannis Koumoutzelis on 24th January 2013 10:36pm

Posted:A year ago

#9

Nicholas Pantazis
Senior Editor

968 1,161 1.2
I think much of this article is relevant, but ultimately Michael is right. The stock market is about predicting the way forward, not where you are now, and Apple DID NOT have record profits, they had record revenues, and disappointing profits. They also had constantly decreasing market share. Apple's chunk of the smartphone market, even as sales rise, has shrunk considerably, and failed to grow at anywhere near the rate of Android.

They face similar difficulties in the tablet market. While the iPad continues to be very popular, the rate at which Android sales are catching up is astonishing. In 2013 Apple will have less than 40% of the tablet market, and less than 20% in 2014.

What investors are doing is normalizing. Apple's stock was priced insanely high under the very poor assumption that Apple's growth was unlimited and absolute. They believed it would surpass competition from Samsung/Google/etc. and become the dominant OS and manufacturer of the future. It's now VERY clear that's not the case, and that Apple will be what Apple has always been: ~10% of the market with high profits and satisfied consumers. A niche in the corner of devoted fans, but largely irrelevant when placed up against the open operating system it competes against.

It's the story of Apple's life. Innovate, push the market forward, be overtaken by competition from a more open and flexible competitor adopted by many manufacturers. That's the tale we're seeing here, and that's what the stock market has finally reacted to. Not these little rumors.

Posted:A year ago

#10
Nicholas: Apple did have record profits. It did not exceed its previous record (set 12 months ago) by very much, but it did exceed it. Margins shrank, yes, but that's at least in part down to the iPad Mini, whose margins are much tighter than other Apple products - representing a rare and interesting land grab by the company. As for Apple being overpriced, as crazy as it sounds, the company has actually been *underpriced* by any traditional financial equation balancing p:e and growth against stock price. The market just isn't very good at figuring out how to value stocks that spring from being bit-players to being the world's largest company in the space of half a decade.

You make a variety of grand claims regarding Android's growing dominance, yet such things are actually very hard to measure. What do Samsung, Google and Amazon have in common, aside from being the main vendors of Android gear? The fact that - unlike Apple - they do not break out unit sales figures of their devices. Instead we have the slightly nebulous "activations" figure from Google, some analysts throwing darts at graphs, and a general sense that Android is doing well (which it is), stacked up against Apple's official sales, the browser market share figures showing iOS trouncing everyone else, and hard data from a small number of phone networks, where the iOS vs. Android picture is deeply mixed. So, is Android really growing in line with expectations to become the "Windows of its age", pushing iOS into the niche that tech-heads are all keenly anticipating? That's a "maybe" at best. This is a deeply non-transparent market and your confidence in your statements belies the degree of feeling around in the dark that's going on here.

As for the "story of Apple's life", that's a demonstration of exactly the narrative trap I was talking about. It's neat and tidy to sum things up that way, but it doesn't fit the facts. For a start, where does the iPod fit in your Apple story? A product line that popularised digital music players, dominated the market, spurred on tons of competitors and saw all of them off, until finally being effectively replaced by... the iPhone, an Apple product that disrupted Apple's own market. I'll grant you that I don't see iOS panning out the same way, but if we're leaning on narrative precedent (which doesn't strike me as a great way to decide investment strategies!), it's equally valid.

Posted:A year ago

#11

Nicholas Pantazis
Senior Editor

968 1,161 1.2
@ Rob Er... Samsung provides device sales numbers, and they alone sell more smartphones than Apple. Obviously Android is grossly outselling iOS. I don't see how "activations" represent anything nebulous? They are a very specific measure of Android, and as specific as Google could possibly give us being the owner of the operating system and not the sole manufacturer.

As for the sales side, numerous firms track mobile sales. I'm not sure why you trust NPD as gospel but can't believe IDC's numbers showing Android represented 75% of smart phone activations for Q3 while iOS represented about 15% (I rounded up for you), in the quarter the iPhone 5 launched no less.

And browser market share? Really? If you want to talk about nebulous data here's where we can break it down. iOS gives its users a grand total of ONE choice of default browser, while Android offers at least half a dozen with millions of users. Oh, and that data is tracked through extremely imprecise sampling from firms with no actual retail sources or concrete data, usually from online ad networks (like Chikita) which are largely blocked by many Android browsers (which feature adblock software), keeping them from registering on their trackers.

No, it's not a maybe. It's a reality of the market that I don't think you want to see. There's not a lot of uncertainty left in the smartphone market as it stands today. Of course, disruptive products of the future can always change things, but Apple's ability to maintain any sort of "dominance" was long gone when Samsung greatly surpassed Apple in sales alone. The Galaxy S3 largely competes with the iPhone on day-to-day sales alone, so even ignoring every other high end Android device from Samsung and others, Apple hardly enjoys any sort of "dominance."

I don't think traditional corporate value equations apply when you're talking about the creation of an entire market that didn't exist 6 years ago. A market that iOS largely created, and then subsequently lost anything resembling majority control of. As we get nearer to a technological singularity, overinflated value like Apple's may become more common. Things will be invented so quickly and markets we can't possibly predict will be created so regularly that it may be impossible for an aging and largely tech-ignorant stock market to follow.

PS: Yes, I was really only referring to Windows. The iPod was an almost unchallenged creation, though obviously becoming slowly irrelevant in a smartphone world.

Posted:A year ago

#12

Bruce Everiss
Marketing Consultant

1,716 598 0.3
I had a friend (now sadly dead) who had been chairman of the Birmingham stock exchange.
Among other gems he told me that stock price only matters on the day that you sell.
He also said that each time a stock price doubles you should sell half, then your holding has cost you nothing!

Posted:A year ago

#13

Dave Herod
Senior Programmer

517 731 1.4
Sounds like a good tactic, Bruce. And I guess the first is just the same as house prices. Unless you're thinking of selling your house, house prices are pretty irrelevant.

Posted:A year ago

#14

Tom Keresztes
Programmer

632 223 0.4
Samsung phone sales grow 58 percent and sold 60 million smartphones (so much for ignoring high-end devices) but that is a fall from last years 82 percent. Then shares fell to a two-month low.

Posted:A year ago

#15

Adam Campbell
Associate Producer

1,118 888 0.8
@Rob Fahey

What you said seems all well and good but we're missing the point here. The stock market is largely based on future confidence and future growth. Apple's valuation and some of their expectations with sales were overambitious to begin with.

So even if things look good on the ground, these markets are based on confidence and that confidence is waning. iPhone 5 had a poor reception, Samsung are outselling Apple, other companies have more/better low end offerings (4S costs fortune compared to rivals still), Huawei is incoming. Then the idea that Apple will stay on this pedestal as a solo company with barely two slightly updated products a year is just ridiculous.

Its really as simple as people getting far too overexcited. You know, valuations like this and share prices don't mean an awful lot. The only reason these companies are there is to make more money on a bizarre, virtual money market. But seeing as they are there, its obvious that Apple's business model isn't as exciting or as sustainable as people incorrectly thought. Its really their own problem to deal with and sort out - so there's no point bemoaning the lack of confidence and share falls as if they're not justified.

I'll repeat something I said earlier, they need more innovation, a wider range of products/prices and better industry standard technologies support to begin with. Otherwise they simply don't have the depth and capability to be number 1 and they could be pushed to 3 even.

Edited 1 times. Last edit by Adam Campbell on 26th January 2013 12:12pm

Posted:A year ago

#16

Tom Keresztes
Programmer

632 223 0.4
i would not downplay the iphone5 just because they had supply issues almost up to christmas.

link maybe worth looking into how the iphone5 is actually performing on the market. Most of the purchases are upgrades from previous phones, and i would not be surprised if smartphone sales are going to level out in the next few years.
Android is a platform, not a product. iPhone5 might be doing better than the S3, but thats not the entire market.

Edited 1 times. Last edit by Tom Keresztes on 26th January 2013 12:36pm

Posted:A year ago

#17

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