What’s Going On With Apple?

It was after midnight Florida time when my call finally got through to my friend in Cupertino, a senior manager at Apple (AAPL). I asked, what gives? The stock is off 24% from its September peak, fresh on the heels of its wildly-successful iPhone 5 launch. Is there something going on with the company that I should know about? Should I start buying here, or unload what I already have?

He said the people at Apple were just as puzzled as I. Business is great. Revenues are ramping up as expected. Early production bottlenecks had been addressed, and sales of 275 million phone units in 2013 might be possible. The introduction of the new iPad mini had been a blowout success, clocking 3 million in sales in the first weekend alone. An upgraded iMac with blistering performance was coming out in December. The peak Christmas selling season was probably going to be fantastic.

He said the recent plunge in the share price was solely a stock market event and had nothing to do with the company. Did I have any ideas what was causing it?

I thought for a second. I have just traveled across the heartland of America. The Obama win came as a complete shock to virtually everyone in these cities, as it was for most of the Republican Party, especially in the investment community.

As a result, the increase in capital gains taxes in 2013 which they thought would never happen in a Romney administration was suddenly placed squarely on the table in front of them. Apple had become not only the largest holding of many managers, thanks to the fever of the past year. It also possessed the largest unrealized capital gain. These factors combined to generate only one conclusion: sell!

This is clearly what has been driving the stock down for the last seven weeks. Worst case, the selling continues until the end of this year. Best case, it finished on Friday with a $536 print. The election result may have finally given us our final capitulation sell off.

For long-term value players, the stock has fallen to insanely cheap levels. Ex-cash, it is selling at 7.5X 2013 earnings. The company has amassed a staggering $130 billion in cash, or $150 a share, and it continues to pour in at the rate of $250 million a day. The dividend yield for this hyper growth mega cap is 2%, versus 1.60% for the ten year Treasury bond. People like me who have been at this game for 45 years have never seen numbers like these. Once the shock and awe of the Democratic election win wears off, I expect investors to pile back in.

For those who are telling you that the Apple bubble has popped and we’re on our way to $400, please tell them that they are out of their minds, in the nicest way possible, of course. Bubble tops happen at PE multiples of 100X, not the 12X we saw in September. And by the way, Apple’s PE multiple hit 37X in 2000. The company has only 5% of the global cell phone market. Past market leaders, like Motorola and Nokia, saw their market shares peak at 15%, with inferior products to boot.

Those with stable, long-term money should be increasing holdings here in a stock that should double in three years. Take Apple’s historic peak earnings multiple and potential industry peak market shares together, and there’s an argument for it going up six fold from here.



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