Apple (NASDAQ:AAPL) stock is down almost 20% year-to-date and down about 40% from its September peak over $700 a share.
Critics are talking about the end of margins, the end of investor optimism, the end of its dominance in the smartphone market … and all of those things are true.
Proponents are talking about the single-digit P/E, the $140 billion in cash and investments, the fact that profits and sales are still growing despite the doom and gloom … and all those things are true too.
So the $400-billion-dollar question — is Apple stock a buy?
It may be for the long term, I suppose. But the bottom line is that there is far too much short-term volatility to risk placing a bet on this tech giant — especially given underperformance amid a significant rally for the S&P 500.
Yes, there are rumors that Apple will spend tens of billions on a dividend increase and a stock buyback program, setting a “floor” under the stock. This comes after a high-profile move from big-time Apple investor and hedge fund icon David Einhorn complaining of a need to deliver cash back to shareholders.
But unfortunately, that may not be enough. Because as Jeff Gundlach recently explained, Apple has completely debunked the idea of efficient markets and fair value based on fundamentals.
In other words, Apple remains a sentiment-driven investment above all else, and that means traders are taking the tiger by the tail. Rumors and psychology rule the roost.
What Could Turn Apple Around?
Apple could come back with a big catalyst, like the launch of an innovative device that connects with consumers, but I wouldn’t hang my hat on an iWatch or iTV. Margins on televisions are notoriously thin, and a Dick Tracy watch is very sci-fi but far from populist or practical.
What about spending that war chest on a competitor to grow and gain a foothold in a new market? Well, buyouts aren’t historically Apple’s style, and there are no clear acquisition ideas that would make an immediate impact. Remember, this is a company clearing $150 billion in annual revenue, so only a mammoth deal would make an impact.
There’s also a chance that some financial tricks could cheer up shareholders — including producing one of the most aggressive dividend and buyback plans in tech, by some reports.
Delivering cash back to shareholders is a tempting carrot, but it doesn’t seem likely to move the needle on sentiment in the short term. Some, like growth guru Louis Navellier, think stock buybacks are always a good thing. But keep in mind Apple’s repurchasing stated in October 2012 when shares were in the high-$600 range. Not exactly good timing to spend that money. Buying a top is always a risk with buybacks, because corporations tend to be flush with cash just as momentum wanes. And many investors are hip to the fact that buybacks are a bit of clever accounting, shrinking the denominator in EPS without ever growing the earnings part of the equation.
And as for dividends, the company already yields 2.5% — more than 10-year U.S. Treasuries. I suppose Apple could double its $10.60 annual dividend to over $21 since that’s still last than half of its fiscal 2014 earnings per share … but the millions of investors looking for Apple to continue innovating won’t be thrilled to see it take the foot off the gas on product development and instead divert its cash flow to dividends. That would be the equivalent of admitting that very little growth remains beyond Apple’s current reach, and that the business has plateaued the same way Coca-Cola (NYSE:KO) or McDonald’s (NYSE:MCD) has.
Oh yeah, and all those arguments about EPS growth forecasts and P/E ratios based on 2014 earnings? Just remember that earnings are notoriously subject to change. Take the March earnings cut from Credit Suisse on iPhone fears as just one data point.
Tech Is Wide Open
We haven’t even talked about the tech landscape yet. That’s because nobody knows where we’re going from here.
And don’t forget Microsoft (NASDAQ:MSFT) Surface and the new Z10 and Q10 from BlackBerry (NASDAQ:BBRY). These companies may never be sexy with consumers but they remain powerhouses in enterprise. Despite Apple’s overtures at being a player with businesses and government, almost every IT person I know laments the very inflexible and inconvenient quirks of making iOS devices the norm on their networks.
In short, there are a ton of moving parts for Apple stock — both on the tech front and the investor sentiment side. To me, that adds up to one hot potato in the short term.
And if you believe the current market highs will fade in the coming months, then there’s even less reason to play with AAPL now.
- My breakup letter to Apple. (The Slant)
- An analyst who predicted the AAPL tumble now says sell Google and buy Apple. (Apple 2.0 via CNNMoney)
- Mark St. Cyr says Apple’s price crash may be a blessing in disguise for the company as it evolves in a post-Jobs era. (Slope of Hope)
- A brain drain could be much worse for Apple than Android competition or investor sentiment. (Business Insider)
- If Apple follows the oil analogy, it still has some falling to do. (Market Anthropology)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.