Downgrade Shouldn’t Dent AAPL Stock
In my investing career, I have never seen a company do just about everything right, yet receive so little respect from the market. Apple Inc. (NASDAQ:AAPL) is one of the best-performing companies, if not the best, and certainly the best-managed company on the S&P 500. Yet, AAPL stock remains one of the most speculative bets on the market, beating all sense of market rationality.
The latest price drop in AAPL stock is courtesy of yet another analyst review. This time, it’s Morgan Stanley’s Katy Huberty, who is forecasting that the company will likely witness a drop in iPhone sales in 2016 for the first time in its history. (Source: “Morgan Stanley Lowers Its Apple Price Target by 12%,” Fortune, December 14, 2015.)
Huberty has not downgraded the stock and continues to rate it overweight, maintaining her overall bullish stance on AAPL stock. She has, however, cut the price target from $162.00 down to $143.00.
What the market completely overlooked is that Huberty’s forecast excludes products other than the “iPhone” and it also excludes the two big launches expected in March.
The expected launch of a smaller four-inch “iPhone 6c” in Apple’s March event is being touted as a product that will receive strong reception. As phablets continue to crowd the smartphone market, the demand for smaller phones is, once again, kicking in. Additionally, “Apple Watch” has been a hit launch this year and the expected sequel, the “Apple Watch 2,” with upgraded features will be no less. Apple is also stepping up its game on the services side, with both “Apple Pay” and “Apple Music” going strong.
Anyone who understands the economics of businesses must understand that no model can sustain growth into perpetuity. Growth must ultimately taper off into maturity. The ingenuity of an investor lies in finding a business that can sustain maturity for the longest period without its products becoming a commodity.
I, for one, don’t see Huberty’s forecast to be such big, bad news to warrant a selloff. After all, there are only so many phones you can sell. Eventually, competition will catch up and unit sales data will become trivial. Ultimately, investors must gauge the company’s strength in terms of its relative market share and aggregate revenue growth. Apple is growing strong on both market share and top-line numbers.
Investment guru Warren Buffett may not invest in tech stocks for his personal lack of understanding of their business, but he does offer some great advice for investors. His investment mantra is to pick a well-managed company that offers the highest margin, the highest return on equity, and the lowest debt to equity in the industry in which it operates, along with a brand that enjoys strong differentiation. Apple fits his description precisely.
The Bottom Line on AAPL Stock
For the hefty cash, expanding market dominance, solid revenue growth, cheap price multiples, and some very promising new ventures in the pipeline (like the rumored “Apple iCar”), the market is clearly underestimating Apple’s true value.
In times like these, I’m reminded of Buffett’s advice: “Be fearful when others are greedy and greedy when others are fearful.”