As earnings season arrives, I flash back to last season. Steve Jobs, Apple's (Nasdaq: AAPL) Master Maestro, Don of Dons, stepped down for medical reasons (again) and our prayers are still very much with him and his family. I adorn him with accolades as he is the master. He left everything in place, well aware of another blow out earnings cycle. The Verizon (VZ) deal was all but inked, the iPad 2 was already in production and a cadre of crucial projects were in the pipeline. Everything was in its place.
Back on January 25, 2010 I posted Apple: I’m a Believer, and I am still a believer. Like so many other times in Apple’s history, the company is at a crossroads. This time it’s not about product innovation and new operating system, or waging war on “the man.” The newest issue is one of stock price and multiple. The company is mammoth. Almost 50,000 employees, a market cap over $300 billion, and a presence felt in every corner of the globe.
Yet, somehow, this company is still growing at enviable rates. Last quarter’s year over year revenue growth topped 70%. The firm has no debt and is sitting on enough cash to buy any country it wants. The firm boasts a trailing 12 month return on equity of 36.80%. We all know the growth has to slow, but more than that is already priced into AAPL. The reality is that even with a slow down anticipated, its PE and PEG are so low that I am embarrassed to even post the numbers.
I suggest that all of senior management and the board go for a weekend of R&R to re-learn some important lessons. I suggest they enjoy some fine wine, let loose and watch the most important business movies of all time: The Godfather, Parts I and II. Not just to watch, but to listen and learn. Do not focus on the significance of the oranges and the fact that the assassins ignore Alfredo having a gun in his hand when his father is being shot, leaving him unharmed and available for vendetta. The biggest lessons are on the transfer of power, esteem and respect.
The world needs to know that these attributes have been fully earned by Tim Cook and the management team. Let’s face the fact that we are already in a post-Steve Jobs Apple. I am not trying to kill him off or not wish him well. We all would love him firmly back at the helm. If he cannot return to work or simply wishes to take it easy, we want him to do that – he has earned it. Jobs returning as a full time CEO is not a likely scenario. So I suggest that Steve needs to say to Clemenza and Tessio (the market): “If you trust my judgment, listen to and be a good friend to Michael (I mean Tim). Give him your full respect and the firm the multiple it deserves."
Take a step back and look at the horrible curses the market is slinging on Apple, trying to prevent the rise of its stock. AAPL passed the market cap of Microsoft (MSFT), a firm that went from the Goliath of software to last year’s value stock. I ask, “So what, who cares?” Apparently everyone. Now the next evil eye is fixed on the firm’s market cap. It will eclipse that of Exxon Mobil (XOM), and become the largest firm in America as measured by market capitalization. Again I say, “So what, who cares?”
Apple has already become the most important designer and distributor of stuff in America. I’m not here to debate the prowess of Facebook, Twitter, etc. I’m a public equities manager and want to discuss stock prices, companies, fundamentals and market sentiment.
Sentiment is switching away from Apple and the wall of worry that Cook and Co. are climbing to achieve fair valuation for their stockholders is high. For sentiment and confidence to re-gain its trajectory and, subsequently, for the company regain its multiple, the best answer I can find is an orderly transfer of power and focus.
When Michael Corleone took full control of the business, he rhetorically stated to Tom, his still trusted advisor and lawyer, “Who better than my father (the previous Don) to advise me?” I ask, "Who better than Steve Jobs to officially be a Special Advisor to the CEO?" He is the ideal mentor, provocateur and
I am still a believer. We all love Apple’s products and services. I am hoping that full market confidence and sentiment can be reignited and we can see the current fair valuation (right now I have it around $420/share) achieved.
Disclosure: Mr. Corn is Chief Investment Officer –of E5A Funds LLC. Through various equity strategies under his supervision he is currently long AAPL.