Considering the close eye we’re keeping on Apple [Nasdaq: AAPL] from our orbiting HQ, we felt (translation: Ken cracked the whip, yelling something about “lazy, no-good writers”) it was time to take a broader look at how the company has been performing of late. So come with me on a hike through the hills and valleys of Wall Street and Cupertino, and make sure you’re wearing comfortable boots. The road to One Infinite Loop is rather rocky.
Considering the close eye we’re keeping on Apple [Nasdaq: AAPL] from our orbiting HQ, we felt (translation: Ken cracked the whip, yelling something about "lazy, no-good writers") it was time to take a broader look at how the company has been performing of late. So come with me on a hike through the hills and valleys of Wall Street and Cupertino, and make sure you’re wearing comfortable boots. The road to One Infinite Loop is rather rocky.
Up, up, and away
For a couple of years, Apple made all the right moves. From late 2004 onward, Steve Jobs and company rode the iPod and iTMS to ever-higher stock prices. Apple had paid off all its debt in 2003 and the cash was rolling in by the bucket load. Fast forward to January 10, 2006, where we begin our step-by-step inspection. The company reported a massively successful holiday season, iPods were selling as fast as Apple could crank them out, and Jobs unveiled the new Intel-based line of Macs. The stock hit US$85.59 a share on January 13, making the company worth US$72 billion. That was US$2 billion more than Dell at the time. Jim Cramer screamed something about "It’s gonna hitUS$100! BUYBUYBUY!" Life was good for the Apple faithful.
Source: Yahoo! Finance
But maybe it was too good to be true. The price drifted lower for a few days—just normal market behavior in the absence of major news. The stellar earnings report seemed to have been digested and forgotten already. The analyst community remained upbeat and kept plugging away at how massive Apple’s growth was, and how high it could go. The tone changed abruptly on the 18th, when Apple issued lower guidance for the next quarter. The drift turned into a rout as the same analysts who had seen such a rosy future panicked and ordered us all to sell. "The sky is falling, growth is slowing, help! Get out!"
Source: Yahoo! Finance
The hills are alive
Now bear in mind the reasons why Q1 2006 was expected to slide in at lower sales and earnings than Q4 2005. The spring never beats the Christmas shopping season, the last quarter was one week longer than the following one, and Intel notebooks wouldn’t ship for another month. Two out of three of those reasons are hardly cause for alarm. But analysts seem to thrive on stating the obvious and whipping up a frenzy whenever possible. It doesn’t matter much whether the hype is positive or negative, as long as there is hype.
And so it didn’t seem to matter that Apple released the 1GB iPod Nano, or that a healthy increase in podcast traffic was reported. The stock hiccuped a bit, then kept going down. Cramer danced a merry selling jig, as did many of his colleagues. It’s amazing how fast a coat can turn when the wind changes, nevermind how subtle the shift in weather conditions. In one month, the stock price was shaved from US$85.59 to US$64.71—a 32 percent drop that took US$23 billion off the company’s market cap. Michael Dell could send a little sneer Jobs’ way that day, as his own company had risen to US$72.3 billion, about US$25 billion more than Apple’s cap.
Source: Yahoo! Finance
Then the Macbook Pro was released on February 13. The concerns about the rollout of Mactels eased considerably, pulling the stock from US$64.71 to US$70.57 in two days. Expectations for Steve Jobs’ Next Big Presentation kept the price rolling around US$70, until the veil was pulled and nobody seemed very impressed by some iPod speakers and a new Mac mini. There was an immediate five percent drop, and then the downward slide was back on. Wheeeee!
This time, the decline was slower. With no major Apple news apart from some rumblings about French anti-iTMS legislation in the works, there was simply not much reason for anyone to change their opinion on what AAPL should be worth. The low point was reached on March 28, at US$58.71. Still coasting along with no breaking news except maybe the upcoming 30th anniversary of Apple as a company, you wouldn’t have seen it as bottoming out when it happened. It was just another day, really.
A few days later, Avie Tevanian and Jon Rubinstein left their prominent posts as heads of software development and the iPod division, respectively, but the change had been expected for months, so market makers didn’t seem to care. But then…
Welcome to Boot Camp!
April 5 marked the release of Boot Camp, enabling "Mactel" owners to install and use Windows on their shiny happy Macs, and there was much rejoicing. Suddenly prospective OS switchers could get the best of both worlds, with the security of running the same old, same old on their new hardware if that’s what they wanted. The stock shot up 12 percent in two days, topping out at US$71.24 before settling back to the familiar pattern of adjusting down after the excitement of the latest Big Thing™ died down.
The remainder of April saw AAPL trading between US$64 and US$68, and not even an earnings release for the second quarter broke it out of that range. Not that the quarter was spectacular or anything, with decent earnings on disappointing sales, but it was hardly the disaster our analyst friends had been crying about for the last three months.
Ah, but it looks like the stock has in fact broken out of that month-long trading pattern now. Last Wednesday, updated Macbook Pro models kicked things up a notch, and on Thursday those gains were solidified by Steve Jobs assuring the world that he will spend more time at Apple, not less, after the Disney/Pixar merger is completed. "Teh Steve" says he harbors no desire to become the new Michael Eisner (no surprise there), and that he thinks Bob Iger really is the best man for the job as Disney CEO.
The stock closed at US$70.39 at the end of the week, gaining over a dollar during Friday’s trading. The mythical Mr. Market seems to take great comfort in the idea that the company’s visionary leader wants to take a firmer hold of his first love and leave the running of his side projects in the hands of trusted lieutenants. Delegation and prioritizing are essential skills for any successful leader, and Jobs is showing ample proof of both.
So what have we learned here? First, it seems clear to me that AAPL is a so-called "story stock," a security the price of which is driven by a steady flow of news. The fundamental finances play less part in placing a value on the company than a constantly changing business outlook. As long as the growth prospects look great-to-incredible, the stock goes up; anything less than very good leads to a drop.
Based on Apple’s current cash flow, it seems like the market currently expects an average of around 30 percent earnings growth for the next five years. That is a very impressive growth rate for a company already worth nearlyUS$60 billion. Just for reference, Starbucks grew at 30.6 percent per year during its heyday, 1997 to 2001, and is down to a mere 24 percent five-year average now. Starbucks started that run from a US$3.7 billion market cap. Apple would have a US$220 billion market cap in five years if the 30 percent scenario plays out, which is nearly twice what Google is worth today (and everyone thinks it’s expensive), and close to lapping Microsoft’s current cap. Despite three months of price drops, AAPL is still not a cheap stock by traditional measures.
Can an army of iPods and Mactels lead Appleto that kind of market dominance? Or will Steve pull some more rabbits out of his magic hat and revolutionize one more business? Those are the options if the current stock price and market cap are to be justified. There are no guarantees here, but if anyone can pull it off, it’s the Steve. Just make sure your evening prayers mention him not getting hit by a bus or getting bored with running Apple.
Resources : http://arstechnica.com/articles/columns/mac/applestock.ars
Article by : Anders Bylund