Listening to Gruber and Moltz discuss Wall Street’s “absurd” reaction to Apple’s performance is driving me crazy.
They’re not wrong: the market is a poor representation of how well Apple is doing. However, the reasoning is simple to understand.
About 4.5 years ago, AAPL hit its lowest point since the launch of the original iPhone. Wise investors looking for a strong growth stock knew Apple wasn’t done innovating, so they bought.
And they kept buying at an alarming rate because Apple’s products and profits were leaps and bounds ahead of competitors and continuing to improve.
Shortly after the iPhone 5 launch, however, those growth investors’ expectations shifted. It wasn’t because Apple wasn’t still doing incredibly well - they were. They just didn’t expect them to keep growing at that alarming rate.
To those growth investors that have been buying in since late 2008, Apple’s bottom line doesn’t matter. They’re focused, rather, on the slope of the line. As they speculate that Apple can’t continue growing at the same pace it has over the past few years, they sell off and move on to more traditional growth investments.
As a result, the price falls to a level where slow growth or dividend income investors start to pick it up and it levels off. At that point, it may become attractive for growth investors again because it seems to be leveling off at a point far below the industry average P/E ratio. Time will tell.
That’s why I stay the hell out of the stock market, though. You’re not betting on the performance of a company. You’re betting on a bunch of rich, old guys’ expectations. Even when they’re wrong about the company, they’re not wrong about the stock price because they control the stock price.
I love it when smart people say things that aren’t what everybody else is saying.