Apple – A History Lesson in the Making

I have been following Apple for quite a while now, and its trading history for the past year reflects the fickle sentiments of the market.

There was little doubt that under Steve Jobs, Apple was a fantastic company: a poster child of innovation, brilliance and cutting edge technology, combined with incredible returns on capital and a solid balance sheet to boot. I recommend reading Steve Jobs by Walter Isaacson to see the incredible amount of influence Jobs had on the corporate culture of Apple.

2012 was a challenging year for Apple. The emergence of Samsung as a dominant player in the Smartphone industry and the bumbling of key releases such as iOS 6 and the maps fiasco were just some of the challenges it faced. For me, the transition in leadership was the most pivotal.

Apple is unique in many ways: it enjoys an unparallel following, not only by its customers, but by those that purchase its stock. Following on from forum chatter and reports from industry analysts, it’s not hard to deduce that Apple has some of the most ardent supporters in the industry.

For me, the decision to not invest in Apple was quite simple. I think that Apple is a brilliant company. My family owns a number of devices: the iPhone, various renditions of the iPad, and I personally understand Apple’s appeal. It has an unparalleled track record at allocating capital and for persistent growth, despite operating in a highly competitive and notoriously unstable industry.

What worked against it as an investment were two variables: valuation and the sentiment surrounding the company. Around this time last year, the projections of Apple’s growth were absurd in my opinion, with rumors and news stories flying around about whether Apple was going to release the next version of the iPhone, the iPad mini etc. Furthermore, Apple’s touching a market capitalization of $500 billion was another red flag to me.

Jim Rogers once opined that very few people make money by buying at historical highs. While this alone is not a conclusive factor, it does weigh heavily. Logically it is much harder for a company to go from $500 billion to $1 trillion than it is for a company to grow from $1 billion to a $100 billion. At some point in time, you run out of customers to sell to and your economies of scale disappear. Whether Apple had hit this point is up for debate, but the probability of this certainly weighed against the company.

Finally, the growth projections that were laid out were in my view highly dubious. I have a very low opinion of projections into the future considering that analysts do not even know what products are definitely going to be released. My worry, as with all growth stories, is what happens with companies who fail to meet growth projections. No company has ever consistently met projections and for that very reason, history is littered with businesses that failed as opposed to those that have succeeded. The odds are just heavily skewed against your favor if you choose to invest with the tide.

Fast forward to today, the sentiment in Apple has swung to the other side. Analysts are no longer as bullish as they once were with margins being squeezed. And yet it is in this that to a contrarian investor such as me the greatest opportunity lies. While I am not longing to invest in Apple at the point of writing, it certainly is far more attractive at $450 than at $700, and I will certainly be watching closely as events further unfold.

 

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