Judging from some of the commentary that has followed Apple Inc.'s quarterly earnings on Tuesday evening, investors are scrambling for a comparison to help guide them through the next year or so. Is Apple more like Microsoft or Netflix?
The answer depends on whether you are bullish or bearish, of course. The Microsoft comparison – that would be the bearish one – suggests that Apple shares are doomed to a tight trading range for the next decade.
Microsoft began paying a dividend in 2003, telegraphing that its days as a growth stock were behind it. Since then, as John Shinal at MarketWatch points out, Microsoft shares have risen just 20 per cent, vastly underperforming the Nasdaq.
Now that Apple, too, has boosted its dividend and announced share buybacks, it could be signalling that it has nothing to offer an investor other than a quarterly payment stream.
Okay, but then there's the Neflix comparison – the bullish case. The movie-streaming company fell on hard times last year when the shares fell to a low of $53 (U.S.), down more than 80 per cent from their high, amid concerns about pricing issues, subscriber growth and rising competition.
Since then, the stock has rebounded more than 300 per cent, suggesting that stocks can turn from hot to cold and then back to hot. As Bespoke Investment Group asks, "If Netflix can do it, why can't Apple?"
But investors looking for a template will be disappointed by both of these comparisons. Microsoft has become an unglamorous company whose fortunes are largely tied to the business market, providing it with stability but little growth.
That's not the case with Apple, whose fortunes are tied to consumer products that must be refreshed, continuously, in just the right way – or else the competition will bite. As such, Apple doesn't have the stability of Microsoft, but the upside is bigger if it can keep competitors at bay.
As for Netflix, the company is a thirtieth the size of Apple, in terms of market capitalization, and clearly still has a lot of room for growth – not only in North America, but globally. That gives the share price the sort of upside potential that is harder to see in a $377-billion behemoth.
Comparisons to other companies are seductive because they offer us a roadmap to the future. But they should be seen as little more than lessons: Yes, stocks can flounder. Yes, cold stocks can turn hot again.
In the case of Apple, investors should take a sober look at the company: It has grown to a size where growth is harder to achieve; it is remarkably profitable, but profits are now shrinking and analysts are cutting their price targets; it makes exceptional products, but the competition has caught up.
Its biggest hope is not in distributing cash – the shares were down in mid-morning trading on Wednesday after boosting its dividend and announcing big share buyback plans – but in creating exciting new products that move it beyond the iPhone and iPad. And that's a gamble.