Felix Salmon discusses some of the reasons Apple’s stock price is so low.
What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers
I have a theory.
On the one hand you can buy Apple stock for $375 a share and pay $7 to ScottTrade. On the other hand I also have a trash can in which you can deposit your $375, pay me $5 and I will set it on fire for you.
Clearly, I am offering the better deal as in both cases you have approximately zero probability of getting your money back and I am willing to burn it for $5 whereas you have to pay ScottTrade $7.
Now that’s not quite true. Apple’s stock price is sustained by the fact that if it goes low enough someone will buy the whole company and liquidate it. However, current investors shouldn’t be under any delusions that Apple has any plans whatsoever to provide them with a return on their investment.
As Arnold Kling might say: Thank You for your donation to the Steve Jobs Consumer Product Enrichment Fund, have a nice day.
19 comments
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Monday ~ November 28th, 2011 at 4:34 pm
Johnnie Linn
I am shocked, Karl, that you would think that an act that would cause paper money to be destroyed is a better deal than one in which paper money is not destroyed.
Monday ~ November 28th, 2011 at 4:47 pm
Karl Smith
Awesome Point Johnnie
Monday ~ November 28th, 2011 at 4:40 pm
Michael
Dumb question: Apple’s stock is 10 times what it was 7 years ago (http://bit.ly/tYy2Vb). What’s the case that Apple does not care about ROI for shareholders?
Monday ~ November 28th, 2011 at 5:09 pm
Apex
I could be wrong but I think Karl’s point is something along the lines that the previous gains in Apple’s stock is because Apple happened to produce a product that won in the marketplace. But that is not (or at least has not been) Apple’s primary strategy. Job’s has always been focused on producing what he thought was beautiful superiority. Whether or not the market wanted that, or was willing to pay for it or agreed with his assessment was not even secondary to his thinking. He simply didn’t care. And perhaps in the last 5 years he finally got it right (because at least as far as computers go from a business stand point he clearly got it wrong for the 25 years prior to that).
If the market shifts, or someone leap frogs Apple, or competitors simply produce cheaper crap that takes away market share can Apple adjust, and more importantly are they willing to. A key quote from Jobs from a number of years back was that they simply didn’t know how to produce a laptop for under $1000 that was not a piece of junk. He was famous for calling his competitor’s products junk. However they sold 100′s of millions of those pieces of junk while he sold very few of his pieces of art until the last 5 years.
Now with Jobs gone perhaps that mentality will not be there anymore. But with Jobs gone perhaps the design advantage is gone too. Who knows how it will play out. The real question is, do people at Apple ask what decisions can we make to maximize shareholder value? That is a question that was never asked while Steve Jobs was CEO.
Tuesday ~ November 29th, 2011 at 6:43 pm
neil
As a tech professional who doesn’t like Apple products at all, or own any of them, I can say that he’s right — practically everything out there is expletive-worthy crap. What’s more, there isn’t a single quality brand — if Sony makes a good laptop this year, next year their laptops will very likely be crappy.
I agree that this is a niche, but it isn’t really about art, it’s about technology. Apple is uncompromising about hardware quality and it shows. So people are freaking out about the iPhone’s battery life. Pick up any cheap knockoff and you’ll likely be too frustrated by any number of other failures that you won’t even notice the battery life.
Monday ~ November 28th, 2011 at 5:13 pm
Sam
Maybe another dumb question: are you saying that Apple’s stock isn’t worth owning because it doesn’t pay a dividend or because Apple’s management isn’t trying to maximize profits? The former wouldn’t seem to be an issue, as tons of stocks aren’t currently paying dividends and I don’t really believe the latter either.
Monday ~ November 28th, 2011 at 6:29 pm
XVO
I think he’s saying you will never earn money by *owning* Apple stock. You might make some money if you sell it at the right time but the reason people own businesses is to earn money. If the owners aren’t making money, why bother owning the business?
Monday ~ November 28th, 2011 at 7:42 pm
Andrew
The gist of the joke I think is that companies are supposed to give dividends. Even tech companies. Even ones with huge market shares are supposed to provide a return and spin their assets back to their investors.
Because someday we’ll all be dead, and the company won’t exist anymore. At some point you have to return the assets or your stock is just a meaningless piece of paper. The East India Company had a huge market share also once upon a time.
Tuesday ~ November 29th, 2011 at 2:23 am
Bob Murphy
Karl I’ll give you $6 (between $5 and $7) if you satisfactorily explain what the heck you’re talking about in this post.
Tuesday ~ November 29th, 2011 at 10:09 am
THM
I was disappointed with Felix Salmon’s article.
Apple’s decision to hold cash (a sizable chunk of which is overseas) makes sense. First, there is no need to repatriate it until after the 2012 election, when there is a good chance corporate tax rates will be coming down. Secondly, the cash allows them to adapt quickly to disruptive technologies looming on the horizon.
I suspect the reasons why Apple’s stock price plateaued are (1)they have not created demand for any new products in the past 1.5 years, (2) institutional investors are beginning to worry about the 3+ year time horizon, when the consumers electronics field is looking increasingly crowded, and (3) the valuation in 2010 was probably high.
Consumers electronics are destined to become commoditized into apparel and accesories anyway. If Apple doesn’t hit soon with AppleTV, release a game-changing new product, or make a game-changing acquisition, it will end up competing on the basis of price. This would have likely happened with or without Steve Jobs.
Moore’s Law is b!tch, and dividends are sooooo 1980′s.
http://www.TranscendentHairlessMonkeys.com
Tuesday ~ November 29th, 2011 at 11:25 am
Craig
Be fair: not one dollar has gone to “the Steve Jobs Consumer Product Enrichment Fund” from stock transactions since 1980. Apple is the perfect example of that strange phenomenon: the publicly-traded company that operates without any regard for the people who legally own it.
Stockholders sell to other stockholders, passing around the shares that were issued thirty years ago and have never paid a dividend. Not once. It’s a damned odd situation, particularly for a company that has seen its share of hard times. You always wonder how long it can last.
Tuesday ~ November 29th, 2011 at 6:46 pm
neil
Correction: AAPL last paid a dividend on Nov. 21, 1995, of 3 cents a share (closing price that day, $10.04).
Wednesday ~ November 30th, 2011 at 8:34 am
Craig
I thank you for the correction. Where had I gotten that into my head? Hey ho–I think I still have a workable argument on the basis of sixteen dividend-free years.
Tuesday ~ November 29th, 2011 at 10:00 pm
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Thursday ~ December 1st, 2011 at 7:02 am
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Friday ~ December 2nd, 2011 at 10:08 pm
Derek
In the late 90s Microsoft invested $150 million in Apple and sold it a few years later for a profit. If they had held on it would be worth about $5 billion.
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