Feb 20 2014, 3:41pm CST | by Forbes
The technology sector has had an incredible multi-year run with a string of hot IPOs and the Nasdaq climbing back over 4,000. And yet the advance has come with barely any participation from the sector’s single biggest company by market capitalization, Apple.
Thursday, in a session that saw the Nasdaq and S&P 500 up 0.7% apiece, shares of Apple fell more than 1% to $531.38. In 2014 the stock is trailing broader benchmarks with a 5% decline.
New product categories were the proverbial light at the end of the tunnel for Apple investors who stayed bullish as the stock tumbled from its September 2012 peak. Even after the stock stabilized – helped along by the billions in cash the tech giant has redistributed to shareholders – the expectation of new wearable devices or a forthcoming television kept Apple optimists happy. But the argument that such products will restore Apple to its former growth trajectory has dulled and now another voice has left the chorus.
Barclays Capital analyst Ben Reitzes cut his rating on Apple to neutral from overweight Thursday, warning investors that the stuck may be locked into a trading range for the next year. More importantly, Reitzes admits that the prospect of a new category entrance from the Cupertino, Calif.-based company isn’t enough to justify his formerly bullish stance.
“Frankly, we just couldn’t quite bring ourselves to use smart watches or TVs as a reason to raise numbers – nor were we fully convinced that these products could move the needle like new categories did in the old days,” Reitzes wrote.
Needle-moving developments in Apple’s biggest business, the iPhone, have also been hard to come by. A long-awaited partnership with China Mobile has finally arrived, but Barclays thinks “it will ramp gradually and its high price may limit adoption.”
New developments in the payments space, location-based services and wearables or TV may have greater upside, but none, writes Reitzes, “seems as revoluationary as the iPhone or iPad.” Despite repeated promises from Apple chief Tim Cook that more devices are coming, Steve Jobs’ successor has clearly lost the benefit of the doubt from some former bulls.
Apple’s sheer size (market cap: $474 billion) means that it is still a major holding for many investors and a sizable component of countless indexes. It also routinely shows up among the most widely-held names by retail investors and institutions, but it is rarely a highlight in conversations about exciting tech investments from either a growth or value perspective.
Not only has Apple been slow to enter new categories with in-house products, it has also been beaten out for acquisitions by rivals like Facebook and Google. Whether or not Apple bid for assets like smart appliance maker Nest Labs, which Google picked up for $3.2 billion in January, or messaging service WhatsApp, which Facebook bought in deal worth up to $19 billion Wednesday, is not the point. There is a perception that Apple is being outmaneuvered for the next batch of up-and-coming tech assets, and it’s a perception the company does not seem to have much interest in dispelling.
In fact, thanks to the pestering of billionaire investors David Einhorn and Carl Icahn over the last year, the focus on Apple’s cash hoard has centered on just how much it should be returning to shareholders in dividends and buybacks, rather than whether it should hunt for bigger game on the takeover trail.
Still, the “Apple as a value stock” line of thinking has many skeptics. Wally Weitz, a value investor who manages $5 billion at Weitz Investments, hasn’t been tempted to add Apple to his flagship fund.
Apple’s iPhone business “is great now, but it won’t be that way forever [and] maybe the ‘cheaper, not as good’ competition gets good enough,” Weitz told Forbes last month, which may signal that the stock still has a ways to go before it’s irresistible to value investors.
That’s a possibility that Reitzes touches on his note, comparing Apple to a stock that has been something of a punching bag for years: Microsoft.
“We believe the valuation argument is becoming less and less helpful,” he writes, noting that Microsoft’s stretch from 2000 (shortly after it became the most valuable company by market cap) through 2010 is a troubling forebear that sharpens the doubts that Apple can get right back to its winning ways. Barclays Capital’s analysts “see no precedent that large-size tech companies simply start to broadly outperform again after a tough year or two if the law of large numbers is catching up to them and margins have peaked.”
Reitzes isn’t necessarily calling for another big slide for Apple, and thinks its accelerated buyback program puts a floor under the stock at $500, but his voice is part of a chorus that has grown in volume wondering whether the upside in Apple shares is severely limited.
At a time when Apple is still lauded for its design sensibility, the investment community is looking beyond hardware for future growth in the technology space that will generate further high-margin revenues. At Apple, Reitzes says, such growth “seems stalled compared to Amazon, Google and Facebook.”
Source: Forbes Business
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