I am not an Apple (AAPL) hater, I promise. Some readers got that impression when I suggested that the stock may have been overvalued around $700 and again when I voiced the opinion that the stock was stuck in a range. The comments (no longer available) on the first article were what I should have expected when I pointed out the Emperor’s clothes were, at the least, a little threadbare; a slew of attacks, bordering on the personal, from those who maintained I had no idea what I was talking about.
I understand that AAPL is a thriving company, with phenomenal sales and cash flow, and that by most conventional valuation metrics is cheap below $500. I just feel that the shine is beginning to fade and that the aura of invincibility is no longer intact. Yesterday’s press conference only re-enforced that view.
There was a time when these Apple “events” signaled the release of groundbreaking products and technologies; the ipod and ipad for example, or the unveiling of a workable voice recognition system. This time, however, we were informed of a fingerprint lock (hardly new, the laptop on which I am writing this has one), an upgraded chip and camera and, most of all, some pretty colors! The Onion headline writes itself; “Apple wows the technology world with pastel shades!”
The stock reacted badly, losing a couple of percent in late trading, and extending those losses this morning.
It should be pointed out that this “buy the rumor, sell the fact” pattern has always been the case with Apple product launches. Those that buy on the hype before an event take a profit when it happens, and some of the releases, such as the ipad, demonstrated that the company knew its customer base better than the naysayers. Many maintained at the time of the ipad launch that there would never be a market for a device less portable than a phone, but less powerful than a good laptop. They were wrong, and AAPL has since led the way in tablets, but yesterday there was no sign of the company filling a need that the consumer didn’t even know they had, just a few incremental changes (and pretty colors!)
This time around, investors were looking for a bigger screen or an announcement of expansion of the market in China through an agreement with China Mobile. The latter could yet happen, and, if so, the addition of hundreds of millions of potential customers would indeed be big news. There is a risk, though, that even if that comes, it will, in the new environment of cynicism, be seen as Apple catching up rather than leading the way, and the stock’s reaction may be muted and short-lived.
Put simply, Apple, just like Facebook (FB), which I wrote about yesterday, operates in a market where fashion and perception play an exaggerated role. The perception is gradually changing from “can do no wrong” to “can do no right”, and while pastel colored plastic may address the fashion concerns somewhat, it does nothing to excite customers or investors.
There is no doubt that a stock trading at around 11.5 times the previous 4 quarters earning should represent value, but until some major announcement regarding a new product line such as watches or an expansion of the TV program, or until an agreement is reached with China Mobile, AAPL is likely to remain under pressure. A drift back towards the $400 level is likely. At that point, the prospect of a large percentage dividend payout and the technical floor that level offers will probably make it seem like a steal.
Until then, however, dismay with the pretty color strategy looks set to be the dominant factor, and there will be better places for investors’ money.