Apple (AAPL) is having a great year and a great decade. Its products are everywhere. It continues to blow customers and analysts away with products and the income those products contribute to the bottom line. But to assume that Apple will be able to continue to do this year after year may be a mistake, and to not consider any potential problems the company may face would be another mistake. That is why it is important for investors in Apple to remain unemotionally attached to this company, and to sell when their original investment goals are achieved.
Apple has done so well in the last decade that investors must now consider if mean reversion is likely, and what business fundamentals might lead Apple to experience mean reversion. For those who are not familiar with the concept of mean reversion, it is the statistical probability that stocks will underperform market averages after long periods of out-performing the market in order for the average stock price and the market average to become similar. The business fundamentals that drive mean reversion are quite simple to understand; three fundamentals are relevant to Apple. First and most importantly, duplicating blockbuster success time and again is very hard to do. Apple will also have to replace the founder and other key people who have made it successful. The last fundamental to consider is the company’s increasing appetite for raw materials. Apple's needs for raw materials have grown over time, and as that appetite continues to grow it becomes harder to source enough raw materials, especially rare earth metals.
Apple’s hugely successful i-family of products (the iPhone, iPad, and iPod) have contributed a major portion of the $14 billion in income Apple expects to make this year. In fact, just six years ago, Apple’s net income was $1.99 billion. That is a 700% increase in six years. For Apple’s income to continue to grow at that rate, it would need to hit $98 billion in six more years. With a stock price that was closing in on $400 a share recently, the market sees much more room for income to grow. I on the other hand do not see the product pipeline and line-up to do that. Even if Apple keeps turning out great new products, the i-family has been so successful because it redefined the markets those products were introduced to; I do not see how Apple will be able to keep doing that.
To add some historical context to how difficult it is to grow a $10 billion company into a $100 billion one, it took General Motors (GM) 31 years and ExxonMobil (XOM) 27 years to do it. Apple would have to add $86 billion in sales in one fifth of the time as these two companies did to continue to grow at the same pace it has been.
Steve Jobs is currently the CEO of Apple, and has he had an exciting career. After starting Apple and making it successful, he lost a confrontation with the board of directors and was fired. Jobs went on the found NeXT, a computer platform development company that was eventually purchased by Apple, in part to get Jobs back. Jobs was hired as the CEO shortly thereafter. He then completely turned Apple around and made it into the tech giant that it is today. The question for me is: When so much of a company's public image and creative genius are tied to one person, what happens when that person is no longer associated with the company? In my opinion there will be, at least, a period of volatility after Jobs and Apple part ways, and this is not currently priced into the stock.
The supply of rare earth metals available for Apple to continue making its products may also be hampered by export policies in China. China currently controls 98% of rare earth metal supplies in the world and has begun threatening to cut the supply of rare earths available for export. At the least, these shortages might cause interruptions that affect product availability, or Apple might have to pay more for the rare earth metals to continue production, forcing it to cut margins or raise prices.
When evaluating if Apple should be a stock you hold in your portfolio in the coming years, there are many things to consider. Can Apple’s income statement continue to grow like it has in the past six years? What effect will the loss of Jobs be on the company when he retires? What effects will access to rare earth metals have on the stock price? These are not hurdles that should be taken lightly, and with mean reversion in mind, each investor in Apple should consider when is a good time to sell this position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
