Apple Runs The Market

"I get asked a lot why Apple's customers are so loyal. It's not because they belong to the Church of Mac! That's ridiculous." - Steve Jobs

Clearly Apple is a phenomenon.  For those of you with short memories, Steve Jobs grew Apple into a massive market force in the 80's only to be ousted in 1985 and watch the company head almost into bankruptcy.  He rejoined the company in 1997 as the interim CEO which he joked made him the iCEO and with his return came the "i" products.  These products revolutionized not just Apple but turned the market on its head and created a huge opportunity that the marketing brilliance that was Steve Jobs exploited.  Since his death the company has continued its meteoric rise and currently is ranked as the largest company by market capitalization in the world.  With a market cap of almost $600 billion it has a huge influence on the movement of the market.  In fact over 15% of the market's move this year is accounted for by Apple stock and it makes up over 4.5% of the S&P 500.  Over a third of all hedge funds own the stock and of the 39 analysts that follow the stock, 34 rate it as a strong buy.

With almost $100 billion in cash and at a price to earnings ratio of 22 it does not appear by any metric that the stock is expensive.  Making billions of dollars a quarter in profit it can afford to pay and has declared a dividend.  This along with the news that the company will repurchase $10 billion of stock drove the shares over $600 a piece.  So the question that I ask is not whether the stock is worth $600 as fundamentally there are many reasons to answer yes, but rather can the company continue into the future carrying the stock market on its back?

I would answer unequivocally no.  Apple's position at the top to me is temporary.  A multimedia electronics company has to innovate to remain on top.  With Jobs around this appeared to be possible but now that he is gone I would argue their time is limited.  The cult that is Apple buyers will not stand by if Apple cannot develop new exciting cutting edge products.  As long as the company can roll out these types of products the company can maintain its margins but once they lose their edge all is lost.  Already the discerning consumer can purchase products that perform as well as an Apple product for 30% less.  To me it is only a matter of time before the company loses its way and thus its generous margins.

Think of Research in Motion as a modern example of a company whose innovations could not keep up with consumer desire.  The stock has fallen from well over $100 a share to $13 today.  Never in the history of the market has a technology company built on innovative products held the top spot for an extended period for one simple reason, they cannot stay ahead of consumer desire forever.  At some point they lose their edge and a competitor comes out with a new product (just as Apple did) and takes market share and erodes the stock value.  With the loss of Jobs I feel that this innovative edge is eroded and a time bomb is ticking.

So why my concern about Apple stock?  I do not own any and do not own any Apple products so what do I care?  I care because so many people's net worth is tied either directly or indirectly to a company that cannot maintain its trajectory for much longer.  I doubt it will not fall tomorrow or next week or probably not even next month and maybe not even this year, but at some point it will lose its edge and it will drag the whole market with it.  Looking at the share ownership and seeing a lot of hedge funds owning the stock is scary enough.  These are fickle folk (I should know as I am one) who are prone to run at the first sign of trouble and this could not only have a large impact on the stock price but I feel it will have a ripple effect on the market.

Keep an eye on Apple as even if you are not an owner of the stock it is and has and will drive the returns of your stock portfolio.  This is a fickle market with a fickle leader (Apple).  This is not a market built on solid economic fundamentals which is my concern and is another reason that I remain skeptical of the market in general.  Think about it, the company at the top of the food chain is a company that relies on consumers to buy products that they do not need, at a massive price multiple above their competitors at a time when consumers around the globe are strapped financially.  I expect that as in the past, this will not end well.