Einhorn: Wall Street Doesn’t Understand Apple

| Apple Stock Watch

Apple's Wall StreetThe stock market simply doesn’t understand Apple, according to Greenlight Capital hedge fund manager David Einhorn. He believes that Wall Street sees Apple as a hardware company, when instead the company behaves as a software company.

That might be a tad simplistic, in that Apple does sell devices, but Mr. Einhorn was stressing that Apple has an ecosystem that has, “captured the consumer.” Once they buy an Apple product, he believes, they want the next one, and the one after that, according to coverage of a letter Mr. Einhorn sent to investors covered by Forbes.

Compare that to hardware-only companies—he used Motorola Mobility, which is now owned by Google. He called the company’s past hit, the RAZR, a, “one-time winner because when someone else made a phone that was just a little better, RAZR sales stopped.”

Mr. Einhorn also addressed some specific issues among Apple skeptics. The most amusing of his points was his refutation that people should be concerned about the idea of Apple’s stock price doubling to US$1,000 per share, which would value the company at $1 trillion.

“A trillion dollars?” he wrote rhetorically. “We’ve scoured the Nasdaq listing rules, reviewed the Securities Exchange Act of 1934, and engaged a leading numerologist. We can’t find any prohibition on trillion dollar market capitalizations.”

He said that Apple skeptics are “misguided,” and that Apple remains a cheap stock at its current valuation. With a price-to-earnings ratio of 14 and an 11x multiplier on future earnings, that Apple isn’t priced as a growth stock, and thus shares “remain cheap.”

Greenlight Capital owned 1.5 million shares of AAPL as of March 31st, 2012, a stake worth some $868 million as of Wednesday’s close of $579.17 per share, up $6.90 (+1.21%). That’s an increase from the 1.3 million shares the fund owned near the end of 2011.

Mr. Einhorn made a name for himself by shorting shares of Lehman Brothers before that firm’s collapse. In May of 2011, he began calling for the ouster of Steve Ballmer as Microsoft’s CEO.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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Pretty much all arguments being put forward by AAPL skeptics boil down to one thing:  This thing can’t possibly go on forever.  Then if you ask them why, they trot out some misapplication of the law of large numbers.

Furthermore, each time AAPL comes up with a new hit product they all talk as if this is the last successful product Apple will ever have, even though they are repeatedly proven wrong.  why do they think the latest hit is the last hit?  Because they cannot conceive what Apple’s next blockbuster is going to be.  But of course they shouldn’t otherwise they would be running Apple rather than churning out drivel.

The key to deciding whether to invest in AAPL or not is to understand that you are not investing in Apple products but that you are investing in Apple’s innovation machine.


You know what else Wall Street didn’t understand? Derivatives.

AAPL’s stock price is undeniably high, and it’s got the most amount of cash on hand of any company I’ve heard of. But AAPL’s stock price isn’t based upon silly things like cash on hand, sales, or earnings… No, it’s based on what people are willing to pay for it.

October 3, 2008 AAPL was $97.07, it had just fallen from $176.79 on August 22, 2008. Target price for APPL was $235 in June, 2008. What happened with Apple that caused their stock price to tank like that? Was it the horrible iPhone 3G that absolutely no one bought, if you ignore the 6.89 million people that bought it July to September, a record achievement for a phone maker. Was it that Apple was woefully mismanaged and found itself without any cash reserves and looking at a massive loan default for failing to make a loan payment, if you ignore the $24.5 billion Apple had in cash reserves in October of 2008, for the first time more than Microsoft’s cash reserves of $20.7 billion.

No. The one thing I can tell you is that Apple’s stock price has nothing to with how well the company is performing, it’s only based upon what some douche is willing to pay for it on Wall Street.

Constable Odo

No. The one thing I can tell you is that Apple?s stock price has nothing to with how well the company is performing, it?s only based upon what some douche is willing to pay for it on Wall Street.

You got that right.  But since I think the hedge funds are in collusion to hold Apple’s share price down or keep it rollercoastering, I can’t see Apple’s share price reaching those lofty numbers that are being thrown around.  Otherwise, I honestly don’t understand how a company that’s making money hand over fist on a daily basis is how the share price keeps getting knocked down.  In the computer and cellphone industry where layoffs are becoming commonplace, Apple is still expanding staff and manufacturing facilities and yet the stock still gets slapped about as though there was something wrong with the company.

The main excuse I hear is that Apple can’t sustain revenue growth because Steve Jobs is dead.  I also found it amazing to hear that investors were likely pulling money from Apple to buy Facebook stock and that might have been the reason for Apple’s last month share drop.  Unbelievable.  It’s difficult to know what to believe when it comes to Apple’s share movement.


People’s arguments that Apple’s growth is not sustainable is like saying, “Someday, we all have to die.” It is a known fact that Apple’s growth is not sustainable and it will slow down at some point. Tell me how it will play out.

Everyone points to Sony as an example of how Apple will fall off a cliff. There is a clear progression of Sony’s decline. Once the company stops focusing on innovation and tries to simply cut costs, things go south. Focusing on innovation brought Apple to where it’s at today. Talk to me when it can be shown that that has changed.

The idea of large numbers gets trotted out because people think that when the stock price is that high, the company has to post increasingly more impressive quarters to sustain its valuation. That is, the market’s expectation for the stock get progressively higher until they become too high for the company to meet. What people fail to realize is that first of all, Apple’s valuation isn’t really all that high. People are just getting carried away with the stock price. Apple trades at a 13x multiple, incredibly low for the tech industry. Apple is trading at around 8x expected earnings (Yahoo Finance). So really, the market isn’t expecting Apple to grow all that much. The market’s expectations aren’t really all that high in light of this information.

So yes, Apple is worth a lot of money in absolute dollar terms. But there is no question that Apple has the financials to back it up. You can’t argue with $110 billion in the bank and 100%+ YoY earnings growth.


So yes, Apple is worth a lot of money in absolute dollar terms. But there is no question that Apple has the financials to back it up. You can?t argue with $110 billion in the bank and 100%+ YoY earnings growth.

Very nice summary, thevupster. I think daemon’s pithy summary still holds, and puts this in context.

My own discussions with people on Wall Street suggest that this is multifactorial, although Einhorn clearly articulates one aspect of this.

The oversimplified version is that there are, broadly speaking, a couple of camps: a) those who know that Apple are worth a lot and have ample room to grow, but in a cynical and self-serving ploy (this is after all Wall Street), seek to control its value to suit their interests; b) the sceptics; those who simply do not get Apple at all and, as you and the article suggest, apply the wrong metrics and spook themselves into believing the company will bottom out. This is probably the larger group, I am led to believe. The ‘this can’t go on forever’ argument that aardman mentions above, they seem to think, has a near horizon, and is imminent.

If true of this latter group, Apple’s continued performance at some point should chip away at the sceptic camp.

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