About a week ago, I politely asked Sirius XM (SIRI) observers and investors to stop being so hysterical. After a while, the cries of conspiracies and manipulation from the bulls and ill-informed half-truths about the future from the bears get tiring. Today, I send out a similar alert to Apple (AAPL) fans: Stop Talking About Value.
Nearly three months ago, I wrote an article explaining why I had made the decision to sell my stake in Apple. I got chided for not only selling the shares, but making such an "emotional" overture as to why. Since then, I have been engaged in debates over valuation in relation to three stocks: Netflix (NFLX), Research in Motion (RIMM) and Telsa Motors (TSLA).
For each stock - and most stocks, for that matter - I argue that valuation and fancier terms like "financial metrics" mean little, if anything, in relation to the stock price. What counts is one or some combination of the following - potential, emotion and "the story."
I do not sound a bearish tone on NFLX because it's overvalued. I am bearish because of how management runs the company and communicates with investors and because I do not see the consumer market having room for Netflix as the new media landscape continues to evolve. I am still bearish on RIMM because the company flat out lost its way and management's ineptness will prevent RIMM from turning things around. Low P/E ratios should not even enter the conversation. And even though, technically speaking, TSLA is overvalued, it means little because the long-term story remains intact, justifying today's somewhat lofty price per share.
Despite its towering superiority over the other four above-mentioned stocks, the same rules apply to AAPL. At a Monday closing price of $315.32, of course the stock is undervalued, but what does that have to do with anything?
I learn something (and, often, more than one thing) each time I read an article written by Seeking Alpha contributor Andy Zaky. I get the most out of writers like Zaky who teach me something I did not know or make me think about things differently with nearly every article they write. That said, I think Zaky fell into the AAPL fan value trap with his three most recent Seeking Alpha articles.
In Apple's Valuation: The One Article Every Investor Should Read, Zaky made a prediction I could get with. He spoke my language when he cited Descartes and then said:
Apple was radically more undervalued than every other large cap tech stock during the lows of the financial crisis. Yet, the stock still continuously traded at very depressed valuations between October 2008 and March 2009. Why?
Because market price is, once again, the function of nothing more and nothing less than supply and demand. The fact that Apple was trading at a 9 P/E made not one bit of difference as to the supply-demand imbalance leading to its depressed stock price. Supply-demand is in not beholden to valuation.
I cannot stress how important it is for investors to understand this concept. It is the most fundamental principle, the first axiom, the 1+1=2 foundation underlying the financial markets. Apple is not "given" a stock price based on its valuation. It trades at a stock price based on whether on balance, there are more buyers than sellers of the stock at a particular price point. Are more people convinced to buy the stock here at $343 a share or are there more sellers at this price level? The why, the reason, the logical argument doesn't matter at present value.
Zaky then lost me when he started talking about P/E ratios as a means to predict stock prices. In my mind, he ended up contradicting his initial thoughts.
In Apple to $400 by July, I felt like Zaky made a reasonable case. I had long adhered to the notion that some major event - earnings or, in this case, Apple's WorldWide Developers Conference - would finally provide the impetus for AAPL to right the market's wrongs and stake its claim to its true value right around $400. If you read past the headline, you know that Zaky, smartly, qualified his prediction. AAPL did not perform as he hoped it would technically so the prediction was off. I have no problem with that. He's a smart technician.
In his latest article, Bullish Cross Initiates Fourth-Ever Buy Rating on Apple, I think Zaky lets emotion take over. His love for Apple, the company, clouds what he should know better about AAPL, the stock. Zaky writes:
Along with only trading at 8.13 times our 2012 earnings estimates, the stock is currently only trading at 11.8 times our October estimates. This means that if Apple continues to trade here at $325 a share, it will trade at only 11.8 times its trailing 12-months of earnings come October. At $280 a share, the stock would trade at a ridiculous 7x our 2012 EPS forecast and 10.3 times our October 2011 earnings forecast.
It would basically be valued in the same way as Research in Motion is today. Because of the market's short-term blindness to this obvious reality, we find it prudent to put a strong-buy rating on the stock if it so happens to trade under $300 during a potential brutal summer correction. During the financial crisis, the lowest P/E Apple saw was in the 10-range and we all know how that turned out.
Again, he allows the numbers to get in the way of the reality that he, himself, pointed out in the initial excerpt. I think every investor should read my rationale for selling AAPL when I did. And not just because I wrote the article. I think it cuts to the chase about what really drives stocks these days - potential, emotion, and the story. In AAPL's case, "noise" replaces potential.
When I wrote that article about selling AAPL, the stock had closed at $344.56 in the previous session. I lamented the fact that I felt compelled to sell, noting the following:
... Apple is incredibly undervalued ... Apple's problem is not just that investors expect big things from the company, but they take them for granted ...
If Apple misses earnings, it's like Alex P. Keaton coming home with an "F." If Apple meets or even beats, observers break out into the music of Janet Jackson. It doesn't matter what Open Table (OPEN), Netflix, and others have done for shareholders lately, it's all about what they intend to do tomorrow. One day, these companies will no longer enjoy such a grace period. For all intents and purposes, it's over for Apple.
I am also concerned about the post-Steve Jobs era ... Investors will replace Jobs' uncertainty with an indirect and vague anxiety about the future (once he leaves the company for good). It's just what the street does to Apple, right or wrong.
My points have nothing to do with fundamentals or technicals ... It's pointless to even attempt to invest in Apple on the basis of these factors. In today's market, AAPL should not have a P/E of 20. It should not trade at $345 with tons of cash, no debt, billions in revenue and profits, massive earnings growth, and enormous social and cultural cache. It should not exhibit bullish signs on a chart, only to reverse course suddenly on a rumor, noise, or nothing at all.
You can call AAPL undervalued until your blue in the face, it doesn't change the warped psychological sentiment working against the company and holding the shares back.
I feel exactly the same way today. The last thing I want to do is fall into a value trap. I won't do it with RIMM and, even though Apple management is actually competent, I won't do it with AAPL. AAPL bulls find themselves in a precarious, if not downright risky, situation right now.
First, they're salivating at these seemingly bargain basement prices. They look to the pathetic performance of RIMM and think, "There's no way AAPL can end up sharing the same valuation as that poor excuse for a company." And they continue to hope upon hope that, sooner or later, something Apple does will be good enough for the "big, smart money" and the retail investor, both of whom will need to add more shares to their position or initiate a new one for AAPL to really run.
It's all wishful thinking at best.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours.
Additional disclosure: I am long SIRI and TSLA. I may initiate a long or short position in any of the other stocks mentioned at any time.