Apple Inc. (AAPL), the world's largest company by market capitalization (roughly $925 billion), has inspired cult-like devotion among its customers and fierce loyalty among investors, who have enjoyed a sevenfold increase in its share price over the past 10 years. But serious doubts about the company's future prospects appear to be gaining traction among professional money managers, who have unleashed a wave of selling. Bloomberg cites concerns about future iPhone sales as a likely reason for the selling pressure, though worries about the stock market in general and tech stocks in particular may be factors as well.
Apple was a market leader in the first quarter, but in a rather dubious sense. Institutional investment managers cut their aggregate holdings of Apple by nearly 153 million shares, the biggest net reduction among all companies in the S&P 500 Index (SPX), Bloomberg calculates. This also is the biggest quarterly reduction since Bloomberg began tracking this data in the first quarter of 2008, and it follows net sales of almost 79 million Apple shares by portfolio managers in the last three quarters of 2017.
Tepper Sells, Buffett Buys
Among the big sellers in the first quarter was hedge fund Appaloosa Management, run by billionaire investor David Tepper, Business Insider reports. The fund dumped nearly 4.6 million shares that would be worth more than $860 million at the May 16 market price. In a separate matter, Tepper reportedly has agreed to buy the Carolina Panthers of the National Football League (NFL) for $2.2 billion.
Bucking the trend is Warren Buffett, whose Berkshire Hathaway Inc. (BRK.A) purchased an additional 75 million Apple shares in the first quarter. Without this huge purchase, the net reduction of holdings in Apple would have been considerably more dramatic. (For more, see also: Buffett's Berkshire Hathaway Buys 75 Million More Apple Shares.)
Upbeat Earnings Report
Apple reported earnings for its most recent fiscal quarter, which coincided with the first quarter of calendar 2018, on May 1. EPS beat estimates by 2%, while revenue was better by 40 basis points. In response, as the chart above indicates, the share price has shot upwards, beating the market handily thus far in 2018. (For more, see also: Apple Traders Bet Stock Will Rise 9% to New Record.)
'Do Not Confuse a Great Company With a Great Stock'
A number of concerns about Apple were raised prior to the May 1 earnings announcement by CNBC contributor Dan Niles, a founding partner and senior portfolio manager with AlphaOne Capital Partners. He would rate the stock an "underperform," noting that he loves the company's products, but adding: "I always like to say, do not confuse a great company with a great stock."
In short, he sees saturation in many of Apple's key markets, where consumers are using older products for longer periods of time before replacing them. He observes: "The smartphone industry is where the PC industry was in 2011...the last year the PC industry saw unit growth...Your old PC will be slower than a new PC, but it still does what you need it to do." Similarly, he has seen no need to upgrade from the iPhone 6 that he bought in 2014, since the improvements to later models have been marginal, in his opinion.
In fact, Niles says that he solved some performance problems with his old iPhone simply by buying a new battery for $29, on the recommendation of an Apple technician. He adds that, while sales of new smartphones were flat in 2017, purchases of used phones were up by 13%. He sees a parallel with the market for vehicles, in which the average car or truck in U.S. roads was built in 2005. Later models are "much better...but they are not fundamentally different" in his opinion.
'Two Types of Retailers'
In the context of the hefty $1,000 list price for the new iPhone X, Niles quotes Amazon.com Inc. (AMZN) founder Jeff Bezos: "There are two types of retailers: those folks who work to figure out how to charge more, and companies that work to figure out how to charge less, and we're going to be the second." Apple clearly has opted to be among the first type, even though, Niles says, "New phone specs are more evolutionary than revolutionary." He expects growing customer resistance to doom Apple's approach.