This is somewhat of a joint post between the two of us, as we have both sold Apple (AAPL) in the last week (AH, all shares@$189.59 and MB, 66% shares@$190.00) after having some discussions about the stock.
Our thought process was fairly simple and it revolved around the question: What is priced into the stock? There is no bad news surrounding Apple right now. Any thoughts that they, being a manufacturer of premium products, would be struck down by the recession have been quelled as they rolled out earnings numbers that almost defied belief. The myth that without Steve Jobs the company would be a body with no head has been squashed, as they performed admirably during the health-related absence of their CEO. They continue to excite and amaze the population with relatively minor and incremental upgrades to their products, due to the strength of their existing market position and their incredible marketing abilities. The ever-persistent rumors about a tablet or touchscreen notepad-like product have reached the pinnacle as analysts expect a product arriving early next year that will energize that dormant segment like they did the music and mobile phone industries. Even beyond this, this is the belief that Apple’s innovative power will continue at the speed of Moore’s Law and that everything they do will work so well in the future as to cause network effects that will cause limitless profits.
As stated before, there seems to be no bad news priced in, but I see a few dark clouds on the horizon. Windows 7 is arriving soon, and is supposed to be the first product from Microsoft (MSFT) that can truly compete with OS X. Apple may no longer stand to benefit from having a unworthy competitor. Additionally, Apple’s impeccable track record with nearly everything they touch means that if the much hyped tablet concept turns out to be anything other than astounding, investors could be disappointed.
At the time of this writing, Apple is within 5% below its all time, intra-day high of approximately 202.98. That price was reached in December 2007, just before the financial crisis really took hold of the markets. At that point, there were equally no reservations among analysts that AAPL was going to the moon. It was after that point that doubts began materializing.
Given the abundance of good news and the lack of bad catalysts, we are not calling a top on AAPL. However, until the good expectations baked into Apple’s price begin to materialize in a meaningful way we think there are other investment opportunities with better potential rates of return after considering Apple’s 100%+ run from the bottom on March 9th, 2009.
Disclosure: Michael is long AAPL, Andrew is long MSFT. Both love Apple products.