Dear Mr. Berko:
Early last year, several months after Steve Jobs died, when Apple was trading at $520, you wrote a column saying the stock price would take a huge dive. And I agreed. Well, it didn’t, and the stock went on to be more than $700. But last April, it fell to $385, and I bought 50 shares and now have a good profit. I’ll hold the stock if you think it has a chance to go to $600 or back to $700. L.S., Springfield, Ill.
There’s no denying that Apple Inc. (AAPL-$431.77) shares have been a stunner during the past decade – especially since early 2009, when smart money bought the stock in the $70s.
However, don’t make the mistake so many others have made by ascribing long-term consequences to short-term events. Lots of folks want to believe that AAPL can move back to $650 or $700, but I think those numbers are wishful thinking. When Steve Jobs passed in October 2011, the excitement, the nervousness, the anticipation and the dream – integral parts of AAPL’s future – also passed. AAPL shares have fallen significantly from their $705 high in the fall of 2012, and I cannot imagine a compelling reason for these shares to return to their previous highs.
The stock is out of favor; the bloom is off the rose. AAPL’s glamour factor is vaporizing. Its products are being copied by competitors. Current innovations lack excitement. New product development is tepid, and demand (especially for the iPhone) appears to be on the wane.
Several firms, especially Samsung, seem to be giving AAPL a run for its money in the intensely competitive handset market. Samsung, a well-capitalized, brilliant competitor, is nipping on AAPL’s heels, and its tablet and compelling iPhone alternatives in the premium smartphone space are giving AAPL cause to pause. Now it appears that a significant portion of smartphone revenues will derive from lower-end devices in emerging markets where AAPL is unable to participate. And without the creative hectoring of Jobs, I doubt that AAPL will continually develop superior products (hardware, software, services and third-party apps) and fend off strong rivals in a marketplace that’s highlighted by short product life cycles and intense competition. So AAPL has become increasingly reliant on partnerships with third-party software providers, such as Google and Facebook.
Today AAPL reminds me of the enthusiasm that surrounded Microsoft Corp. (MSFT-$34.98) years ago when investors believed that MSFT’s high growth would rule the world and that its share price would rise to the moon. In reality, MSFT shares have traded in a very narrow range in the past 14 or so years. Frankly, if you had purchased 100 shares of MSFT in 1999 at $100, you’d own 200 shares today (it split 2-for-1 in 2003), worth $7,000, and have a capital loss of $3,000.
You must be mindful that in a finite world, high growth rates always self-destruct. If the base from which the growth derives is small, it may be a while before it slows, but when the base expands, the party ends because a high growth rate eventually forges its own anchor. However, MSFT’s dividend growth has been impressive and may continue to be, and I suspect that AAPL’s dividend growth may be as impressive.
Carl Sagan (my favorite astronomer) entertainingly described this phenomenon in his musing about the destiny of bacteria that reproduce by dividing in two every 15 minutes. Said Sagan: “That means four doublings an hour and 96 doublings a day. Although a bacterium weighs only a trillionth of a gram, its descendants, after a day of wild asexual abandon, will collectively weigh as much as a mountain. In two days, they will weigh more than the sun, and before long, everything in the universe will be made of bacteria.” But Sagan advised us not to worry, because “some obstacle always impedes this exponential growth. The bacteria run out of food, or they poison themselves, or they become shy about reproducing in public.” I think AAPL is likelier to touch $395 again than it is to rise to $650.