Image via CrunchBase
This time, the proximate cause is an announcement from Cirrus Logic, a key Apple supplier, stating that earnings will come in well below expectations and, by association, investors are now expecting Apple to come in low again too.
Lately, it seems like everybody wants to beat up on Apple (me included - see here and here). After a decade during which the company could do no wrong, now it can seemingly do no right.
However, while it’s true that Apple has its problems (and serious ones at that) it is still a great company and a great business. I think anybody taking a clear headed view of Apple has to take into account three factors:
The Products: I’m deeply embedded in the Apple ecosystem and very happy with their products. I love my iPhone, my iPad and my Macbook Air is far more reliable than any PC I ever worked on (I'm not so crazy about my Apple TV, but it works well enough). For me, Apple products are worth the premium, at least for now.
I do find myself somewhat envious about what’s going on in the Android world. I’d like to have something like Google Now and don’t understand why Apple is the only major smartphone manufacturer to not have a model with NFC. It seems to me by doing so, they are slowing a lot of innovation in the industry.
So I think about switching sometimes, but every time I do, I remember about the Apple store and the Genius Bar. By fully embedding myself in the Apple ecosystem, I’m sure that whatever problems I might have (and I did have one particularly nasty hardware problem), will be handled easily, effectively and conveniently. I wouldn’t want to give that up.
The Management: Steve Jobs made Apple a special company. Now that he’s gone, it’s clear that Apple has lost a step.
However, its also important to remember that current management made Apple a very good company. CEO Tim Cook is an outstanding operational executive and Jony Ive is the design genius behind the beautiful products that catapulted Apple to becoming the most valuable company on the planet (at least for a short time).
So while current management has shown no sign of a vision for the future, they show every sign of competence.
The Stock: Apple’s valuation (Disclosure: I’m an indirect investor through a fund) has fallen over 40% from its high because its become clear that we have no reason to expect the growth the company has delivered in the past. This is a completely normal market reaction.
However, Apple’s situation is somewhat abnormal because there was never any growth premium built into the stock price. Even during its rapid rise, it still traded at a discount to the S&P. It was earnings, not irrational exuberance, that made Apple so valuable.
So while I’m as skeptical as anyone about Apple’s future, the market has clearly mispriced Apple. As Jay Yarow and Henry Blodget at the BusinessInsider point out, even assuming a steep drop in margins and zero revenue growth, Apple still represents a reasonably good investment.
In other words, while it is fair to compare Apple’s future to Apple’s past and present, when compared to most enterprises, it's still a great company and trading at a 40% discount (on a price/earnings basis) to the overall market.
- Greg
