You have to feel bad for Apple (NASDAQ:AAPL) -- in many ways, the company is a victim of its own success. On the back of soaring iPhone sales, shares of the company had finished in the green every year since 2008, only breaking the streak last year by reporting a narrow 4% loss. The impetus for last year's loss was not the company's financial performance, which saw the company grow its diluted EPS figure for fiscal 2015 a massive 43% over the prior year.
Instead, the reason for the company's underperformance last year appears to be bearishness toward Apple's iPhone sales path going forward. More recently, multiple analysts have expressed doubts that Apple can continue its streak of increasing iPhone unit sales going forward. For 2016, Morgan Stanley analyst Katy Huberty expects Apple to ship 218 million units, a 6% decrease from the recently completed fiscal year. For a visual representation of Apple's iPhone sales by fiscal year, including Huberty's estimates, see the chart below:
While reasonable people can disagree about Apple's iPhone sales, Global Equities Research Co-Founder Trip Chowdhry pulls no punches with his newest Apple commentary. Instead of discussing the merits or limitations of the company as an investment, Chowdhry resorts to ad hominem attacks, calling Apple CEO Tim Cook "completely clueless." If you set aside the unnecessary rhetoric, and dig into Chowdhry's concerns, his argument doesn't pass muster.
You can't blame Cook for contracting margins
Specifically, Trip Chowdhry blames Cook for fostering a culture of "bozos," and "destroying $486 billion in shareholder value." How he comes to this eye-popping total is by a simple price-to-earnings analysis: Under Steve Jobs, Chowdhry claims, Apple's P/E ratio was consistently above both the greater S&P 500, and greater than 20 times earnings. With Apple now trading in the low-double digits, nearly half of the S&P's P/E ratio of 21, Chowdhry blames current management for failing to maintain these valuation multiples.
There's one problem with his analysis: Chowdhry places blame on the wrong entity. This is oddly common among market observers -- the belief that a CEO is responsible for the stock's performance in the short run. In reality, the daily machinations of the stock market are, in many cases, statistical noise. Even longer-term sanity is not guaranteed, as Keynes said, "the market can remain irrational longer than you can remain solvent."
Furthermore, Apple's valuation compression is also because it has been so successful, as valuation multiples tend to narrow as market capitalization increases. This is similar to Microsoft's (NASDAQ:MSFT) lost decade where CEO Steve Ballmer actually improved the underlying business by growing revenue 10% annually, and the bottom line 7% annually. However, valuation compression almost drove the company's market cap from nearly $700 billion to less than $300 billion. The key difference is that Apple has already experienced this valuation compression, and it's still a $550 billion company.
If only they had Apple Watch...
While Chowdhry doesn't go into detail about how Apple can expand its valuation multiples outside of a C-suite overhaul, the analyst, in the past, has been shockingly naive in his analysis of Apple. In 2014, Chowdhry boldly proclaimed:
They only have 60 days left to either come up with something or they will disappear. It will take years for Apple's $130 billion in cash to vanish, but it will become an irrelevant company ... it will become a zombie, if they don't come up with an iWatch.
Needless to say, this call was universally lampooned. And it should have been. While we've all been wrong, projecting Apple's demise for arriving late with a smartwatch reflected a lack of understanding of the smartwatch value proposition, the depth of the smartwatch market, Apple's product monetization mix, and Apple's history of late, but market-redefining, products. One year after Chowdhry's convictive call, Apple still hadn't released its watch, but the stock increased nearly 70% in its absence.
Chowdhry's call appeared to succeed in one key metric, however: It increased his personal profile, and that of the firm he founded with wide-ranging coverage on his bearish note. For analysts, then, there's a perverse incentive in having the loudest, most audacious opinion on a stock or the market overall.
On one hand, you are forever known as the "analyst who predicted [insert improbable event here]" if you are correct. On the other hand, however, the seven other convictive calls that were wrong are quickly forgotten, but still help elevate your profile in the short run. Meanwhile, investors following your advice are worse off.
Chowdhry and I do agree on one fact: Apple is now undervalued. I think so, even if iPhone sales slow. However, I'm blaming this less on Tim Cook than I am on a thankless Wall Street and its analysts, who price a stock at a P/E of half the S&P 500 after watching the company grow its EPS figure 43%.
Before you go call other people bozos, perhaps you should first ask if the moniker applies to yourself.