Why Apple should ignore its shareholders

February 12, 2013
Allan Sloan neatly divides the world of Apple obsessives into two types of people:

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Allan Sloan neatly divides the world of Apple obsessives into two types of people:

For most people, Apple mania means buying the company’s products and playing with them. But for us financial voyeur types, the fun comes from watching the lunatic lurching of Apple’s stock price.

Financial journalists love any stock doing the lunatic-lurching thing, because that creates an easy heroes-and-villains story. Were you bearish at the top? You’re a genius! Were you bullish throughout the fall? You’re a goat!

James Stewart has a classic example of the genre this weekend, putting on his straightest face and contriving to be shocked — shocked! — that Wall Street was bullish on Apple stock during its recent decline:

Fifty of 57 analysts rated it a buy or strong buy; only two rated it a sell. Apple shares continued their plunge, and this week were trading at just over $450, down 36 percent from their peak.

How could professional analysts have gotten it so wrong?

It wasn’t supposed to be this way.

This is very, very silly: the clear implication here is that the analysts following Apple should have seen the fall coming. But you can’t time an individual stock like that: no one can. Especially when there was nothing — no thing — which caused the stock to fall. Apple stock was going up, and then it was going down. That happens with stocks: they’re volatile things. But you can’t expect anybody, no matter what their job is, to be able to anticipate all those fluctuations.

Instead, analysts generally do something else. At heart, they’re fundamental analysts: they look at a company’s numbers, and decide how much they think the company should be worth, given its revenue and profitability and prospects. Even at its peak, Apple was trading at pretty low multiples — and on top of that, it had a lot of upwards momentum. So it makes perfect sense that most analysts had “buy” ratings on the stock, with price targets somewhere north of $700. And given that nothing fundamental changed in the past few months, it would be weird for one of those analysts to suddenly slap a “sell” rating on the stock just because the ratios are becoming even more attractive as the stock gets cheaper.

With any stock, there’s always a bear case, and Stewart lionizes the one bearish analyst he managed to find, Carlo Besenius of Creative Global Investments. But even with hindsight, Besenius’s bear case doesn’t seem particularly compelling, based as it was on squishy things like “concerns about product quality and innovation”. You can always have “concerns about product quality and innovation”, and you can always be uncomfortable with “Apple’s arrogance”. But those concerns would have left you out of one of the greatest bull runs that the stock market has ever seen, over the past decade or so.

Similarly, Bethany McLean’s case for Apple being a $200 stock doesn’t actually include any ratios, or any calculation which comes to that number. Instead, she simply asserts that “built into Wall Street’s stock price targets was the expectation that the iPhone would rule the world” — and that therefore any future world which isn’t dominated by the iPhone must have Apple trading at a much lower level than those price targets.

The problem with this argument, of course, is that it’s far from clear that the price targets did incorporate global domination. It’s entirely possible that she’s right, of course, along with other bears like Jeff Gundlach, whose big Apple short last spring looked horrible for a while but now looks much smarter. But at heart, the bear case on Apple is one based on gut feeling: that the company has had its day, that its greatest glories are behind it, and that Tim Cook is not going to be able to continue Steve Jobs’s string of astonishing successes. It’s a perfectly reasonable gut feeling to have. But it won’t tell you when Apple stock is going to drop, and it won’t give you a level at which to exit your position. (McLean’s arguments, for instance, could be used to justify a $100 target, or a $200 target, or a $400 target.)

Meanwhile, the highest-profile Apple bull right now, David Einhorn, is arguably even worse than the bears. He has loads of clever ideas in the realm of financial engineering, whereby the issuance of new classes of stock would efficiently funnel money to shareholders like himself and thereby make them happy. It’s the kind of Clever Idea that activist hedge-fund managers like Einhorn and Bill Ackman often have, but it’s fundamentally a distraction in terms of Apple’s core job, which is to make insanely great products. Basically, everybody knows nothing, when it comes to the famously-secretive Apple, and it would be crazy for someone like Tim Cook to pay much attention to such ignoramuses.

Apple did spectacularly well, for most of the past 10 years, ignoring shareholders completely; at one of its competitors, Michael Dell is so sick of them he wants to buy them out and make them go away entirely. If Einhorn got his way, there might be a short-term boost in the stock, Einhorn would take his profits, the people who invest in Einhorn’s funds would make money — and Apple would in no way be better positioned for the future than it is today.

The day that Apple starts embarking on elaborate financial engineering in order to placate hedge-fund investors is the day that it loses sight of its core mission and starts turning into a mess like Hewlett-Packard, constantly trying to “deliver shareholder value”, whatever that might mean. When Tim Cook became CEO, he was given a restricted stock grant of 1 million shares, which don’t fully vest until 2021. The point was to keep him focused on a time horizon much longer than anything David Einhorn might be thinking about, and the message was that he shouldn’t worry about the stock price fluctuating up one month and down the next: so long as he builds an excellent permanent franchise, he will end up hugely wealthy. Apple listened to shareholders before, when it fired Steve Jobs and brought in John Sculley. It won’t make that mistake again.

Therefore, to use Sloan’s distinction, Cook rightly belongs with those of us who are interested mostly in buying the company’s products and playing with them, rather than those of us glued to the gyrations in the corporate share price. Let Wall Street worry about the Apple share price: very little harm is done to the company if it’s low, and Apple is so incredibly profitable that it has zero need for Wall Street or any kind of outside investment.

Apple shares are an interesting speculative vehicle, in which a lot of money can be made and lost. But they don’t help shape the fortunes of Apple itself — not any more. A close reading of the stock price might tell you something about herd mentality among mutual-fund managers, and the problems of being so big that people feel forced to buy your stock. But the share price has never been particularly useful in terms of being able to predict what’s going to happen next to Apple the company. Let New Yorkers worry about the stock: in Cupertino, they have much more important things to do.


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