Among all the stocks in my Strategy Lab model growth portfolio, Apple Inc. is the biggest loser so far. It has fallen from nearly $700 (U.S.) at the time of the portfolio launch in mid-September to just over $450 after Thursday's negative Wall Street reaction to the latest earnings news.
As a long-term investor who's seen these kinds of wild swings so many times before, I haven't lost a wink of sleep over it. If you think that's because a model portfolio isn't real money, think again. I'm a real shareholder, too.
Benjamin Graham, the famous value investor and author, has a well-known expression about the market acting like a voting machine in the short term and a weighing machine in the long term. Today's votes on Apple don't necessarily line up with the future weighings of Apple's profits. The market makes plenty of mistakes.
Analysts are worried that the iPhone growth is slowing, and that iPad margins are dropping since the introduction of the iPad Mini. They're worried that the mobile operating system iOS is showing its age and is under intense threat from Android. They're worried Apple can't grow in emerging markets because price points are too high.
I still feel incredibly comfortable holding onto Apple stock. I think the company has only strengthened its position in the market over the past few quarters, despite the stock's slide.
In recent media interviews, Apple CEO Tim Cook suggested that, eventually, China will bring in more revenue than the United States for Apple. Respected analyst and blogger Horace Dediu, founder of Asymco.com, recently wrote a post forecasting that this crossover point will happen in 2016.
China is growing so fast for Apple that the company had to break out revenues for the region separately for the first time. Growth in China was 67 per cent year over year, driven by iPad and iPhone. Clearly Apple can still generate huge growth in emerging markets without competing heavily on price. You won't see Microsoft or any other global mobile computing platform vendor generating that kind of growth in China. Yet Wall Street would have you believe Apple is a broken story.
Last week I attended the Deloitte 2013 Technology and Telecom Predictions. The always entertaining and engaging speaker, Duncan Stewart, convincingly explained why desktop computers aren't going away any time soon. We love big screens and we still do our primary Web surfing and work on PCs. This includes Macs. I'd argue that Apple is the best positioned company in the world to create customer stickiness by giving us beautiful integration between Mac OS and iOS devices.
While we're on the topic of screen size, tablets are growing in popularity over smartphones when it comes to surfing and consuming Web content. I think the use cases for tablets will only expand. As one example, look at the university textbook market. I remember spending hundreds of dollars twice per year on engineering texts. I think the next generation of students will buy these as ebooks, and it won't just be for university. It will include the K-12 market. Apple and Amazon are the two best positioned companies in the world to capitalize on this trend. Nobody has more experience than Apple in structuring global distribution deals for electronic property. Just look at iTunes music sales.
Tablets aren't causing us to get rid of desktops, but they are cannibalizing desktop volumes. As use cases for tablet, like textbooks, penetrate deeper into the marketplace, I think we'll see multiple tablets in the typical family home, and this may happen at the expense of multiple desktops or notebooks. As Apple CEO Tim Cook pointed out on this week's conference call, cannibalization of desktops by tablets is "the mother of all opportunities." Why? Because the Windows market is still absolutely huge compared with the Mac market. Apple may lose out on some Mac sales, but it will see tremendous growth in iPad sales.
Apple stock remains quite cheap, even using Wall Street's recently lowered earnings estimates. According to S&P Capital IQ, Apple will earn $44.33 a share this year and $49.87 next year. That's 12.5-per-cent growth. With the stock around $450, Apple trades at about nine times next year's earnings.
It's inevitable that Apple's growth would slow. But it seems irrational to treat the stock as if the growth is gone. Apple faces immense opportunity. I think it's a great stock to own.