25 January 2016

Apple for the day


The New York Times has an article by Katie Benner about Apple's future:
Investors have long relied on Apple to deliver one crucial attribute: growth. Now they are beginning to wonder whether Apple’s days as a growth stock are coming to an end.
With sales increases of the iPhone projected to decelerate, and no clear new blockbuster device on the horizon, the era of the company’s producing fifty or sixty percent annual revenue growth may be on the wane. When Apple reports earnings on Tuesday, investors will be scouring the results for signs of how fast that downshift is happening.
Already, some investors have begun to treat Apple in a new way: as a “value” stock, a label typically attached to companies that generate predictable business results or a reliable dividend, rather than ones that deliver runaway revenue growth. Value stocks often command much lower valuations than growth stocks.
“People were in love with Apple because hits like the iPod and iPhone created phenomenal growth,” said Ernesto Ramos, a fund manager at BMO Global Asset Management, which manages eighteen billion dollars and counts Apple as its largest holding. “As investors shifted their minds around the fact that it’s no longer going to deliver the same sort of huge growth over the next five years, the stock became a value play.” Ramos says his firm still owns Apple in some of its growth funds, but began including the stock in value funds in mid-2013.
The change has important implications for Apple. While a company like Netflix is regarded as a growth stock because its revenue grew 22.8 percent in the most recent quarter from the previous year, value stocks include aging tech giants like Cisco, Oracle, and Intel. Being lumped in with those behemoths would be a perception shift for Apple.
Switching from being a growth stock to being a value stock can also be a long and painful process. Growth investors need to sell a company’s shares and drive down the price until it is low enough to tempt value investors, who buy stocks they think are cheap compared with the intrinsic value of the company. In the tech industry, a shift from growth to value also often signals to investors that a company is facing newer competitors with more innovative products, raising the question of how relevant the company can remain.
In five out of the last seven calendar years, Apple’s stock performance has lifted the market, especially among its peers. That effect is now waning.
“Investors don’t like to see the words tech and value combined, because when growth slows at a tech company, it usually means that something essentially is not working,” said Angelo Zino, a senior analyst at the research firm S&P Capital IQ. A spokeswoman for Apple declined to comment.
Any change would have repercussions beyond Apple, because its soaring performance in recent years helped lift the broader market. If Apple shares were removed from the equation, the performance of the Standard & Poor’s 500-stock index in five of the last seven years would drop by about a percentage point, according to data from S&P Dow Jones Indices. In 2014, for instance, the index rose 13.7 percent with Apple and 12.9 percent without Apple.
The Apple effect is even more pronounced when technology names are isolated. For tech stocks on the S&P 500 as a group, annual gain in 2009 declined by six percentage points when Apple shares were not included, dropping to 56 percent from 62 percent.
The effect was more muted last year as Apple’s growth decelerated, according to the data.
Investors have turned to Facebook, Amazon, Netflix, and Alphabet, which owns Google— collectively referred to as the FANG stocks— for growth. Those companies are each expected to show annual revenue gains of twenty to forty percent for the last three months of 2015, while Apple is projected to deliver thre percent revenue growth, according to Bloomberg.
Ramos says companies like Amazon have bigger growth potential for his fund than Apple, though he plans to continue owning Apple shares. “Amazon will see about twenty percent revenue growth, and earnings per share are expected to jump considerably,” he said. “This is a very strong growth story.”
Apple shares have already been buffeted in recent months because of worries about the slowing economy in China, which the company counts as one of its largest markets. Half a dozen companies that provide parts for the iPhone also blamed weak demand from Apple for lower-than-expected earnings, causing worries about the company’s sales trajectory.
In total, Apple shares fell 4.7 percent in 2015. So far this year, they are down nearly four percent, while the S.&P. 500 is down nearly seven percent. Alphabet is now within spitting distance of overtaking Apple as the world’s biggest company by market capitalization.
“If you wanted to outperform the market, the FANG stocks did better,” said Jonathan Krinsky, an analyst at MKM Partners, though he added that Apple remained a must-watch stock because it composed such a large part of many stock indexes.
Investors may still someday reanoint Apple as a growth stock, especially if the company can create a best-selling new product that drives up its sales rate. Wall Street analysts cite Microsoft as an example of a business that lost steam and then made the adjustments necessary to deliver strong revenue growth again.
And Apple may have some product aces up its sleeve. The company entered wearable computing last year with the Apple Watch. Apple is also trying to become a dominant software platform in the auto industry and is working on a car. (An executive who was overseeing the car project, Steve Zadesky, is leaving the company for personal reasons, according to a person with knowledge of the matter, who asked to remain anonymous because the details are private. The Wall Street Journal earlier reported on the departure.)
Apple has been reclassified as a value stock before. FTSE Russell, which makes several closely followed stock indexes, found in 2013 that Apple no longer met its criteria to be treated purely as a growth stock. Some of the company’s enormous market capitalization was reallocated to the Russell Value Index, as well as being in the Russell Growth Index. A year later, when the company’s sales had risen strongly with the introduction of the iPhone 6, FTSE Russell placed Apple solely back in the growth index.
Tom Goodwin, FTSE Russell’s senior research director, said that stock price, sales growth, and analyst expectations determine whether a company is placed in the growth or value index, or in both. About a third of the stocks that Russell tracks are included in both indexes, he said.
But until Apple reveals another hit, or shows a significant pickup in iPhone sales growth, Apple should be viewed as a value-oriented name, Zino said. “Historically, Apple was the name to own if you wanted to outperform the market,” he said. “Now there are other places to look.”
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