|by Wes George
Apple Reported Strong Earnings: Why Did The Stock Go Down?
April 24th, 2000
Why didn't Apple's stock soar with the strong earnings report?
Apple announced a killer earnings report by all accounts. Numerous price target upgrades predict AAPL will hit 150 bucks a share before the upcoming stock split. So why did the stock price turn south instead of joyously singing Hallelujah with the rest of the AAPL shareholder choir?
Kurt King of Banc America guessed that, "If the EPS (earning per share) upside had come from revenue instead of gross margin, the stock would be up 10 (dollars)." He's got a minor point there, but if Mr. King believes the average American investor crunched Apple's numbers last Wednesday night after the earnings release and bid AAPL down on Thursday, what other fantasies does he subscribe to?
In fact, revenue growth a year ago in the 2nd quarter was a mere 9%. By the 2nd quarter of 2000 it had accelerated to 27%, and gross margins were up to boot. Thus, even the 60% of AAPL shareholders that happen to be professionally led institutions would find Mr. King's logic too logical to be profitable anywhere besides planet Vulcan.
The American market system is often touted as a collection of the most efficient equity markets in the world. Wall Street lore respectfully holds that "the market is never wrong." Certainly the US system is the best in the world at channeling capital to the most promising business concepts, often well before a company can show profitability.
The flow of capital to where it will be most productive is of critical importance for both the evolution of technology and the growth of the economy. In contrast to US-style investing is the Japanese postal savings paradigm, where trillions of dollars are locked away-- yielding about 1% a year interest!
However, it's far from true that the stock markets are never wrong. To assume such nonsense would mean that every stock is fairly priced all or at least most of the time. If such were the case there would be little opportunity to profit in the stock market, long or short, since the perceived value would always equal the fair value. And fair value would only move gradually as a corporation's business fundamentals evolved.
The truth is that the stock market is a complex system, dynamically bifurcating tick by tick toward a future we can never know, out of a past from which we can only wishfully extrapolate forward-looking scenarios. The market is full of cul-de-sacs, whirlpools, vacuums, high and low pressure regions, all of which contribute to inefficiencies, errors of judgement, and absurdities. In such a state of constant flux there is plenty of opportunity to second-guess the momentary position of the market for a profitable return. That's all that traders and investors alike ever do.
So why hasn't Apple's stock soared with the good earnings report out of Cupertino? Who knows? Does it matter? There's enough noise in the system to account for last week's decline. What does matter is that AAPL's weakness ahead of the WorldWide Developers Conference in May provides an opportunity to take a position in the stock while it's still in an undervalued state. With limited downside from here and rising price targets from the analysts, combined with strong fundamentals, AAPL looks like a good bet.
Certainly the company's leadership seems to think so: they're issuing more stock. While stock splits have little bearing on the value of a stock, corporate management almost never announces splits ahead of tough times. We can be fairly certain the insiders at Apple headquarters are confident that AAPL can split in June and be back into the triple digits by 2001.
Still, I can't resist tossing my hat into the ring of speculation about Apple's weak stock performance last week. It's simple: Apple fared too well in the recent rout of the high tech flyers on the Nasdaq. Apple, of course, isn't an overvalued stock; that's why the bursting bubble in the biotechs and the Internet stocks didn't sully Apple's shine as much as, say, Motorola's or Palm, Inc. However, most of the buyers who rushed back in last week were looking for blue-light specials, perhaps in hope of a whopping rebound for a quick turn over. AAPL wasn't blue-lit enough for them.
The rout on the Nasdaq muddied the market's water. Investment grade money is still sitting on the beach waiting to see what the next tide portends. Perhaps last week was a so-called "bear rally," and a bit more fluff needs shaking out. After all, why rush into a market so ludicrously inefficient and maniacally hyper as the Nasdaq has become? Opportunity isn't a scarce commodity for those with money to invest.
Investors are certainly more cautious than before. Although it logically shouldn't matter, last year at this time AAPL's price was 40 bucks a share. While fundamentally Apple is stronger today than a year ago, graphically the incline looks as scary as some silly dot com venture.
The simplest reason for AAPL's undervalued position could be that the average American investor rarely performs his or her due diligence and so misses opportunities like AAPL while sheepishly piling more on the perennially overvalued Ciscos and Qualcomms.
So much for the market-is-never-wrong theory.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.