Apple Investors Demonstrate Valuable Lesson in Discipline

When the China deal finally became official it was the analysts, not iFans, who became unreasonably giddy.

Jan 3, 2014 at 7:00PM

There are two things every investor can count on as it relates to Apple (NASDAQ:AAPL): a never-ending supply of rumors and some of the most ardent supporters of any company, anywhere, regardless of industry. In fact, for the first time in the 14-year history of Interbrand's Best Global Brands list, venerable Coca-Cola is no longer the most valuable brand in the world; that title now belongs to Apple, with a whopping $98.3 billion brand value.

It's that kind of brand loyalty every company dreams of, but it can also cause problems for investors. How? Because too often, particularly in the short-term, a company's share price can shoot up on little more than rumors and emotionally attached shareholders, ignoring what should be at the heart of every Fool's investment decision: fundamentals. And that's what makes the discipline of iFans following the China Mobile (NYSE:CHL) deal so impressive and exemplary for all investors.

The deal
Rumors of a partnership between Apple and China Mobile have circulated for years, but they really gained steam over the past several months. The deal is potentially big for Apple's bottom line for a couple of reasons. For one, with 763 million subscribers, China Mobile is the largest wireless carrier in the world. And with its estimated penetration of only 35 million to 40 million iPhone customers, that leaves more than 700 million potential iPhone customers.

Another upside to the China Mobile agreement is that the region is already third, behind only the U.S. and Europe, for Apple. Apple could gain significant market penetration in a hurry. There's also the not-insignificant matter of China being the largest wireless market in the world, so you can see why iFans would be excited.

A dose of reality
Given Apple's rabid user and shareholder base, coupled with what could be a boon to smartphone sales, it would have been no surprise if iFans had carried Apple's stock past $600 per share. Frankly, that's what I had expected to happen. But they didn't. Sure, there was a slight pop of about 3.5%, but even that has eased some from the late-December announcement.

Interestingly, it was the industry analysts that were overly giddy following the news, not investors. Many analysts tried to incite a hope-based rally, but Apple investors weren't biting. For example, some analysts began tossing figures like 20 million and 24 million iPhones sold this year to China Mobile customers. Possible? Yes, but hardly a slam dunk.

And those huge sales estimates, said the analysts, would translate to more than $3.5 billion in profit this year on revenue approaching $13 billion. Naturally, these same analysts pushed their target prices up as a result of the estimates -- some as high as $700 a share from $650 a share based on expected China Mobile sales results.

Why Apple investors didn't bite
China Mobile's presale iPhone order estimates of about 100,000 units over the first two days didn't impress, especially compared to the 9 million 5s and 5c models Apple sold when the devices first rolled out in September (in multiple countries, that is). But the dicey preorder results aren't why investors were right to hold off. There are fundamental reasons.

Instigating a momentum-driven share-price pop based on hope when questions remain would have been a mistake. For example, how much of the cost is China Mobile willing to subsidize? Are sales estimates of 20 million to 24 million this year realistic? Why not wait until the iPhones are actually available later this month to get a better sense of user adoption? There are also questions surrounding the actual number of China Mobile's 3G customers, a key demographic for an iPhone upgrade.

To the credit of Apple investors, many had the wherewithal to wait until a few questions are answered before jumping on their beloved iBandwagon, and that's a lesson in discipline every investor should take to heart.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple and Coca-Cola. The Motley Fool owns shares of Apple, China Mobile, and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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