AAPL: Don’t Play the Street’s Game

Positive (at $450). General. Author is rational and intelligent. Somewhat pro-iPhone technology.



GMO stuff: I really need to start following Monsanto; it’s going to be a big crash of the decade when it starts falling apart,


On 2/6, I wrote an article touting Apple’s (AAPLupside potential. Over a month later, and after some share price volatility, we are back right where we were (after adjusting for dividends). Although not much has happened in the intervening time, journalists and bloggers can’t help but put out sensational headlines and traders can’t help but trade up and down the stock. For us long-term shareholders, all this spectacle is very entertaining – but only if you can rise above it.

Don’t Play Wall Street’s Game

A friend of mine who only a month ago purchased shares of Apple at ~$450/share asked me a few days ago if he should sell everything at $435/share. Apparently, the volatility has gotten to him. “Don’t play Wall Street’s game!” I told him. Wall Street is designed to move money around – the more money that moves around, the more they make. Sell side analysts change their “target price” every month or so, as if their models can accurately digest all new “information” and spit out a precise intrinsic value. My best advice on dealing with sell side research is to look at their data, but ignore their conclusions.

The media doesn’t help either. Journalists are incentivized to put out sensational headlines to draw in readers, and the blogosphere is full of wanna-be traders peddling their “insights” (“all my technical indicators says to short this stock until it breaks the $450 resistance level, and to divorce my wife – pronto”).

Leading up to the big unveiling of Samsung’s Galaxy S4 on Thursday, it was as if the media had a serious bout of obsessive compulsive disorder bashing Apple. Then on the day after the release, Samsung is down a whole bunch (who cares?) and Apple is up a whole bunch (fine, it’s almost 3%, but again – who cares?), and now the media is putting out ridiculous headlines like “Apple shares up despite Galaxy S4 threat“. Hello, people, is any of this new? Are you acting clueless or are you actually completely clueless? If you are asking why Apple shares are up, then have you ever heard the phrase “buy the rumor, sell the news”? My best advice dealing with the media is to browse through it for truly material information, and to ignore the rest.

Don’t play Wall Street’s game, guys. Unless you are one of them, you can only lose.

Now, the Upsides

As an equity investor, one should understand that there are real risks to losing permanent capital (i.e. you are forced to realize a loss). Our job is to balance the risks and the rewards. I still believe that the risk-reward profile of Apple is favorable for the long-term shareholder:

  1. Lower share prices are GOOD for long-term shareholders: Recall that Apple is paying out a 2.5% dividend, and is buying back ~$10 billion worth of shares a year. Logic says that the lower the share price, the more shares Apple can buy back, thus increasing the value of the share buyback. As a long-term investor, I hope Apple shares remain depressed in the short term.
  2. Apple has a huge stockpile of cash, with $43 billion being domestic cash that can be used to boost short-term share repurchases and dividends. With no debt, the company can easily raise tens of billions of dollars to further drive share repurchases and dividends without repatriating foreign cash.
  3. Much of the worry surrounding Apple is focused on the company’s iPhone. People are worried that Samsung’s family of smartphones and aggressive release cycles will eat Apple’s lunch. Unlike the company’s other hardware categories (Macs, iPods, iMacs, and iPads), the iPhone does not have a family of products besides providing a multi-tiered offering of iPhones by maintaining the older generation at reduced prices. This, in my opinion, will obviously change, just as it has changed for the iPad with the introduction of the iPad mini. People are so focused on the short term, so fixated on Samsung’s quick succession of releases, that they forgot that Apple can act too.
  4. Samsung’s threat is all fluff, and their products stink. OK, I might be a little biased here and perhaps even completely off base. However, there are a lot of numbers out there indicating that, at the very least, Samsung’s dominance is overhyped. 3 points: 1) Apple is still the leader is user satisfaction among its competitors, 2) Apple’s own research shows that four times as many iPhone users switched from an Android phone than to an Android phone in the fourth quarter, and 3) Apple’s iPhone accounts for two thirds of smartphones watching Web videos. You can argue the validity of these numbers, but these numbers support my own experience as both an Android and iOS user. Simply put, my Nexus 10 is collecting dust while my iPad 4 is replacing my laptop, and I quickly returned my S3 in favor of my 4S. To me, as a non-techie, Apple products are just much more reliable, easier to use, and feel premium (because they are) vs. the cheap feeling (because they are) of Samsung and Google products. I am confident that, at the very least, Apple will be able to hold on to its existing customer base.

I could keep going, but I’d much rather hear from my dear readers. Follow me to receive alerts on future articles and leave comments below so we can continue this discussion. Thank you for reading!


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