Apple has had a rough few months. From October 2018 to January 2019, Apple’s market capitalization declined by more than the total market cap of Mexico or Saudi Arabia, falling by over $450bn in just a few months. That’s a loss for one company which is larger than the entire value of these national indices.
Woefully underperforming broader indices, Apple’s stock has dropped 26% in the past 3 months, while the Dow for example has dropped 0.23%, a more than ten to one scale of losses.
*Apple in blue, Dow in red. Chart courtesy of TradingView.
Apple also posted a weak earnings report on Monday that showed a decline in the company’s quarterly revenue and profit.
To make matters worse, the business that is supposedly dedicated to security (going to great lengths to imply that this made Apple better than other tech giants) has been dealing with a major scandal surrounding a glitch in their app FaceTime. The bug in question allowed you to call someone and hear them without them actually answering your call. Despite not being aware of that glitch, our index held Apple at a 0% weighting, because our model detected certain flags for future problems.
As you can see in the chart above, back in July of 2018 – before their recent troubles - Apple was unattractively valued in comparison to the average company in our universe. Apple looked to us like an over-hyped company, built on the expectation that they will grow into their unattractive valuation. But what happens if they don’t?
We also flagged them for profitability issues back in July, as you can see in the left column:
Apple was flagged because its profitability grew too quickly over the past several years, creating an unsustainable baseline expectation from shareholders – the “encore problem.” This is becoming a perennial problem for Apple, which we wrote about back in May.
“Revenue recognition is particularly problematic for [Apple]. It is plagued by the 'encore problem', how to keep up with the rising expectations which come from rising revenues. Signs that this might be a problem are large increases in either revenues or earnings. It's almost impossible to grow like a start-up forever and eventually there is a topping off of growth as a company matures. The problem is that when a company has a culture of hyper-growth, investors come to expect that, and it gets baked into expectations and valuations. Companies like this tend to have trouble getting off the tiger that they're riding without being eaten by irate shareholders who bought into a hype story.”
Apple’s reputation and valuation required rapid development and growth, tempting them to get products out to market without proper testing for glitches and security issues. Like the other FAANGs, Apple is susceptible to the expectation that they’ll continue to grow like a start-up, and when they fail to meet that standard, their shareholders suffer the consequences.