Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks were essentially unchanged during this abbreviated week, with the benchmark S&P 500 down just 0.1%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI ) lost 0.3%. High-profile auto manufacturer Tesla Motors (NASDAQ: TSLA ) was a big outperformer on the week, while Apple (NASDAQ: AAPL ) and Groupon (NASDAQ: GRPN ) lagged the broad market.
Tesla Motors rose 5.7% this week, mainly on the back of its fourth-quarter results; however, it got an early boost on Tuesday after the San Francisco Chronicle reported last Sunday that Apple's head of mergers and acquisitions, Adrian Perica, met with CEO Elon Musk. That tidbit started an avalanche of speculation that Apple was thinking about acquiring Tesla, pushing the shares above $200 for the first time.
This is an instance of the market reacting first before thinking things through. As I wrote on Wednesday: "One thing I can say with a high degree of confidence, however, is that Apple won't be acquiring Tesla Motors. ... [Their respective] industries are simply too far removed from one another to justify a tie-up." But don't take my word for it -- here's how Elon Musk responded in an interview on Bloomberg Television when he was asked to comment on the possibility of an acquisition:
I think that [a sale] is very unlikely. ... [I]f there was a scenario where it seems like it would be more likely that we would be able to create the mass market, affordable, compelling electric car, then, possibly, it would make sense to entertain those discussions, but I don't currently see any scenario that would improve that probability, so that's why I think it's very unlikely.
You can read my review of Tesla Motors' fourth-quarter results; if you follow the company, note that it will be providing an update on the critical issue of battery cell supply next week.
And speaking of Apple, shares of the iPhone maker fell 3.4% this week, as longtime Apple bull Ben Reitzes of Barclays Capital downgraded them to "equal weight" from "overweight" -- a rating he had maintained for a decade! Worse, Reitzes subjected Apple to the ignominy of a comparison with un-hip Microsoft:
Both companies seem to have been rerated as investors ascribe little probability to a next "big thing" after a series of attempts to reclaim past glory. Apple now trades at 12.7x consensus 2014 estimates -- down from its P/E of 15.9x in October 2012. Microsoft traded around 20x in 2004 after a strong rebound in 2003, but its multiple has settled in the mid-teens since that time.
We don't see evidence that suggests Apple has another product as material as the iPhone or iPad in the pipeline. We are not arguing the nominal multiples here -- but the rate and sustainability of the new contracted multiple from peak is worth noting. Once the market decides that your main product will remain slow for a long time, there does seem to be a visible pattern for multiples to sustain lower levels for a long time even if revenues grow -- as was the case with Microsoft.
I'm bullish on Apple so my first reaction was to reject the comparison as absurd; however, a good investor is well served by giving contrary opinions proper consideration. On reflection, I think Reitzes raises a plausible scenario for Apple shares; however, I think there is at least one weakness in his comparison between Apple and Microsoft: Using price-to-earnings, which doesn't account for the cash on companies' balance sheet, masks just how cheap Apple's stock really is. Consider that Microsoft traded at an average enterprise value-to-EBITDA multiple of 17.5 in 2004; the equivalent figure for Apple in 2013 was 7.1. (Enterprise value is equal to market capitalization less net cash.) I remain bullish on Apple, but this isn't a stock that you can sock away for two decades without following the company.
From two good businesses, Tesla Motors and Apple, to, well, a business: Groupon. Investors sold down shares of the e-commerce site on Friday for a 22% decline (-24% on the week) after the company announced its fourth-quarter results. Yes, Groupon managed to beat the consensus estimates for revenue and (adjusted) earnings per share (although it fell short on EBITDA); the trouble was with the company's guidance for the current quarter, which was hurt by expenses linked to two acquisitions the company just closed.
Groupon's share price volatility make it an ideal trader's stock, but I would suggest investors give it a wide berth. It's a low-quality business that doesn't even qualify as a deep value pick, as far as I can tell. However, if you're looking for a bullish take on its latest earnings, Tim Brugger argues that Groupon analysts got it wrong, again.
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