On Oct 28 the most valuable tech company in the world Apple Inc. (AAPL) issued their fiscal fourth quarter earnings and the numbers were astronomical: net earnings of $7.5 billion, 33.8 million iPhones shipped, revenues ringing in at $37.5 billion. All above analyst expectations. Yet, the next day, the stock dropped 2 percent.
On Oct 30, the most valuable social media company in the world Facebook Inc. (FB) followed with their third quarter earnings report. Like Apple, the company exceeded expectations in both profit and revenue. Additionally, the company raised their revenue level derived from mobile to 49 percent, indication they are making meaningful gains in monetizing the fastest-growing segment of their business. Following the beat, their stock rose, then dropped a percent.
In both cases, there are reasons for the drop: in Apple’s case, a perceived lack of innovation. In Facebook’s, an offhand comment by the CFO in the conference call that pointed out Facebook’s appeal to teenagers was waning. But there’s no fundamental reason either stock should have dropped. Both posted profits above what they were supposed to. Both maintained guidance, if not raised it considerably. Like so many tech stocks, Apple and Facebook dropped because of fear.
Specifically, the fear that those companies aren’t cool anymore.
Tech Investing Question One: Is it Hip?
More than any other sector, tech trades on promises and the nebulous warm fuzzy feeling that the company’s product is “the future.” With Apple, despite talk of emerging markets and products and guidance, to investors the problem has always been Tim Cook. In short, he’s not Steve Jobs. He’s not a visionary, he’s not a leader. He is not cool!
With Facebook, the fears used to be the company wasn’t adapting to mobile quickly enough. Now that the company is, tech investors had to find something else to fret over. When Facebook revealed that despite all the money flowing in, teenagers weren’t adapting to the social media site in droves like they used to, stockholders dropped shares like a hot rock, and turned a 15 percent gain into a 1 percent loss.
Fair or not, in tech coolness – or more accurately, hipness – is important. But the group frenzy searching for cool that drives tech stocks up and down is not entirely rational, and is driven more by a “wow” factor that keeps companies like Facebook and Apple far too low – or in other cases, too high.
Elon Musk: the Tech Sector’s Prom King
Let’s say the tech sector is real life.
If Apple and Facebook are young professionals working in the big city, making tons of money in their own right, then Tesla Motors (TSLA) is the senior living with his parents, but who has a scholarship to Harvard and just built a reactor in the garage. He hasn’t done anything of real worth yet, but oh man! What he could do!
It’s no secret that Tesla trades many, many times over what they are actually worth. The company’s shares, after all, have risen over 300 percent this year as their P/E climbs to unsustainable levels.
But Tesla is the future, see, and Musk is Very Cool. So much so that even a company he is the Chairman of in his spare time, SolarCity Corporation (SCTY) has risen 367 percent on the year.
This isn’t to say that Tesla and SolarCity aren’t worthwhile investments. Rather, they have been driven up for the inverse reason that Facebook and Apple have been hampered: that intangible optimism, that feeling that the future still lays ahead.
What Can Apple and Facebook Do?
Both companies can beat earnings till they’re blue in the face. But their stocks won’t take off until they accomplish one thing.
In short: get cool.
In long: buy companies that are cool, and appropriate them. Facebook made a very, very wise decision when they bought social media company Instagram in April 2012 for $1 billion. Instagram has much more potential for attracting tweens and teenagers than Facebook, and can help patch over concerns that the parent brand is becoming too popular with people over 30 (ick.)
With Apple, it’s a trickier case. Short of raising Steve Jobs from the dead, Apple too needs to buy a company. But who?
While Apple doesn’t have the capital to gobble up a direct competitor in their field, they do have the ungodly amount of cash on hand to buy something even cooler: Tesla.
That exact idea was put forward by analyst Adnaan Ahmad of Berenberg Bank, and while he admitted that his colleagues might find it silly, buying Tesla would certainly do wonders for Apple’s image. With Musk at the helm, or at least in a major position, Apple could actually become cool again.
Of course, Tesla is overvalued right now, at $19.34 billion. In a lot ways, buying Tesla to make an “iCar” or whatever might be far-fetched. But for a company with many times over that in cash on hand, buying the hippest company in tech is certainly an enticing idea.
Because (to paraphrase Vince Lombardi), in tech, being the Next Big Thing isn’t everything – it’s the only thing.
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