That sound you heard yesterday afternoon was the sound of the entire tech industry going from breathless wonderment to hyperventilation, then the entire stock market changing its mind about what to do with their shares of Apple (AAPL) about six times in three hours. And a lot of tweeting, I guess, but that doesn’t really make a sound anymore because everyone has an iPhone and typing on the device is silent.
That’s right, Apple held another major event to announce the release of a new product and a new version of its old product and everyone has, once again, lost their minds.
The announcement included the new iPhone6 (which comes in two sizes!), a new payment system included on that phone to be called “Apple Pay” (meaning they passed on iWallet, which seemed obvious), and a new Apple watch.
Whatever one thinks about the new product launch, and I’m going to go out on a limb here and say at least a few tech bloggers have probably already shared their opinion on this, there remains a larger question: where exactly is this company headed?
New Products Presented in the Same Old Way
My reaction to the way Apple breathlessly rolled out the iPhone6 and the Apple Watch (which we’d have to assume was supposed to be called the iWatch right up until the iCloud leaks made executives realize they might need to go a different way. Either that or that was their plan for what to call the next Apple TV device.) was decidedly not breathless.
The iPhone6 seems to be a device that follows the time-honored Apple tradition of upselling relatively small changes to one of their standard offerings and then telling everyone that it’s a unique, brand new, game-changing update that has completely shifted the paradigm and everyone now needs to replace the expensive device they purchased about a year ago. And the Apple Watch, well, just seemed like a really small iPhone that you could put on your wrist. People in the industry are calling this a big change because it’s “wearable tech,” but I remain dubious. Any iPhone was “wearable” provided you had access to a bungie cord or a roll of duct tape.
But I’ve long since given up on thinking that my opinion aligns with the broader consumer goods market in any appreciable way. In the past, you could have heard me say things like “who would pay $500 for a cell phone?” Or “isn’t that just a big version of the iPhone that doesn’t actually make phone calls? Who would want that?” Or “there just can’t be any way that a 15-year old Canadian musician could ever be all that popular.”
I’m not fancy, you already know. Doesn’t mean that everyone else isn’t. And the fact that everyone else has been willing to run out and buy iPods and iPhones and iPads over and over has turned Apple into the single most valuable company in the entire world.
A Giant Stock with Relatively Giant Volatility
So the question, now, is what, exactly, to make of Apple.
It’s a question that looms large, again, due in part to the big spike in share price that corresponded with the start of the September 9 event. Shares were up in the morning, dipped sharply back to where they closed yesterday, then exploded to over $103 a share over the next hour, then plunged all the way back down below yesterday’s close, and ultimately finished the day at a loss of just under a half-percent.
These sorts of major intraday price swings indicate that the markets aren’t entirely sure what to make of the new offerings and Apple as a whole. Which isn’t exactly news for a hot, young tech company. Except that Apple’s NOT a hot young tech company. It’s the most-valuable company in the entire world.
Case in point, the day’s rocky ride from its peak at $103.74 to its low point of $96.14 a share, a $7.60 shift, represented a swing of $45.5 billion in market cap. Which is a mind-boggling number to wrap your head around. In the matter of an hour, the company’s stock lost more value than FedEx (FDX) is worth in its entirety. If FedEx saw its stock go to zero in an hour that would likely be front page news, but Apple stock did the equivalent to that just because people couldn’t seem to make up their minds about how they felt about the Apple Watch.
Suffices to say, there’s some confusion here.
When is a Blue Chip Not a Blue Chip?
The confusion surrounding Apple persists, to some degree, because the company is sort of defying categorization at the moment.
It’s similar to IBM (IBM) or Microsoft (MSFT) in that it’s a tech company that’s grown to immense size and no longer resembles its small-cap, disruptive brethren. But it also breaks from those companies in that it has really done so at the cost of being a tech company. Now, it’s a consumer goods company that sells high-end devices.
Consumer goods companies don’t, historically speaking, touch this sort of size unless they’re a massive conglomerate representing dozens of brands. Unlike Johnson & Johnson (JNJ) , Apple has one brand. And that one brand really has only a handful of product offerings.
So, no matter how much success Apple has, it seems like many are just waiting for the company’s first big flop to bail out. There seems to remain a certain lack of belief that a company like Apple can really sustain this sort of size into the future. Johnson & Johnson has an extremely diverse group of revenue streams, Exxon Mobil (XOM) is providing the life-blood of our entire economy, but Apple needs people to keep thinking its phones and tablets are just the bright, shiny toys they must have under their tree.
How About We Just Keep Making Billions and Billions of Dollars While You All Are Making Up Your Minds?
That’s a bit flip, sure. Apple products have risen past the level of toys, the smart phone and tablet have become an inexorable part of life for a massive segment of the general population. But they’re still the makings of a pretty skimpy product portfolio on which to build a $600 billion company.
The fact remains, though, that there have been a LOT of industry commentators like myself who kept insisting that Apple was done. That increasing competition was going to eat into its business, that at some point consumers would stop flocking to Apple Stores just to grab a new upgrade, and that a lack of truly innovative new products would bring this meteoric rise to a close. After all, the sort of rarified market air Apple now occupied was reserved for something more substantial than a consumer goods company offering techno gadgets.
And, over and over again, we’ve all been wrong. No matter what else has happened in the world since 2001, Apple has just kept making money. Apple’s been raking in cash since gas was under $2 a gallon, Crimea was part of Ukraine, and Mel Gibson was a bankable action star.
An Apple Falls from a Tree, Then Jumps Back Up It?
But, despite this consistent train of massive profits, Apple’s stock underwent a curious ebb and flow over the last two years. After peaking in September of 2012, the market responded to the recent addition of a dividend, combined with those continued profits, with a huge sell-off. Adjusted for the recent 7:1 stock split, the company peaked at about $100 a share and slid all the way to the equivalent of $55 a share by April of 2013.
Granted, the company’s profits slid somewhat in 2013, but its revenue was continuing to grow rapidly. The better question, of course, is what other company could have that much success, add a dividend, continue growing revenue, and plummet almost 45% of its value? Especially one of this size.
The company’s rebounded since then, with share buybacks and the aforementioned 7:1 stock split that sent a clear message to markets that the company intended to take care of its shareholders, climbed back to over $100 a share for a gain of almost 65%. Certainly, the argument could be made that Apple simply hit peaks and investors take profits, but swings this big for a company this big are clearly notable.
To Buy or Not to Buy
Certainly, there’s no shortage of people who are all in on Apple. Of the 34 analysts covering Apple, 22 rate it a strong buy, along with five moderate buys and seven holds. It’s a big part of most holdings for a lot of major institutional buyers.
But at the same time, it still doesn’t FEEL like the sort of rock-solid, blue-chip stock that plenty of smaller companies are. The relative volatility of the last two years, as well as this week (the stock also slipped 4% on Wednesday of last week) would seem to indicate that there’s still a lot of investors out there still making up their minds.
And I think that’s because it’s operating in an extremely fickle sector (consumer discretionary) with an extremely focused set of product offerings. Even with the addition of a watch, Apple NEEDS people to continue to be obsessed with its phones and tablets. Exxon may be beholden to oil prices, but its demand isn’t going anywhere. Johnson & Johnson can lose a couple of major products and still be profitable. And it’s more in the consumer staple business, really.
But the demand for iPhones and iPads emerged so rapidly it may be the case that some people are concerned it might disappear just as fast. And who’s to say that’s wrong? Maybe Apple really is just a few major whiffs and a great new Droid phone away from a major fall from grace.
Only time will tell where Apple ends up. Ultimately, I’m in. I’m guessing they keep funneling that big old cash pile back to shareholders over time, and I’m guessing that even if they cede a big piece of their market share to competitors over time they’re still incredibly profitable. Basically, I think they ARE the massive blue chip stock their fundamentals speak to, whether the markets are ready to really believe it or not.
So I’m long on the stock. Knock on wood.