Apple's Shareholders Expect Too Much

Mar. 12, 2012 2:20 AM ETApple Inc. (AAPL)107 Comments
John Tobey, CFA profile picture
John Tobey, CFA

Picture of red carpet and gold trophyApple's (NASDAQ:AAPL) 2012 rapid price rise has produced the risk of a significant price drop. The problem is that the uptrend is being seen as confirmation of Apple's superiority, so concern has diminished just when caution is warranted. Instead, there is building confidence that the fast gains will continue. Compounding this up = expectation-of-up attitude are the following erroneous beliefs…

Size doesn't matter

False. Successful, growing companies run through a "sweet spot" where they gain resources, clout and recognition that produces large, exciting gains. Eventually, however, the "law of large numbers" (see this NY Times article) bears down, making it progressively harder to produce similar growth (i.e., percentage gains in sales and earnings).

Competition cannot catch up

False. Success (especially from new markets and inordinately high profit margins) begets competition, both from those trying to one-up the product and from those trying to undercut the price. Moreover, as a company grows, it must not only successfully create more new, large-market products but also successfully defend its past products and markets from competitor encroachment. This is when high profit margins get chipped away.

Apple today has the characteristics of Apple yesterday

False. Fast growth changes a company's environment from a scrappy, focused, collegial, exciting workplace to a more typical corporate environment, with labor and projects divided among ever-larger groups overseen by layered management. Apple now has 60,000 employees and growing.

Apple's "cool" image = loyalty and pricing flexibility

False. Consumers are fickle. Undying loyalty and enthusiastic support can dissipate quickly when a new, shiny something appears (regardless of the source) - or, if a similar product can be had at a lower price.

AAPL is a $545 stock, up 35% from $405 this year

Those numbers, while correct, hide the reality. Apple's #1 market cap value is now $508 billion. 2012's $140 price gain = $130 billion market cap gain

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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