Pebble Theme: Why Is Apple’s Stock Struggling? What Are The Broader Implications?
Last week, we wrote about how some corners of the financial markets are experiencing euphoria once again. That is wild and fascinating and is understandably getting a lot of press.
What is getting far LESS attention is the fact that some very famous and popular companies are not taking part in either the mania or, more surprisingly still, the rising market.
Take Apple. The Cupertino giant is doing nothing much of anything even as the S&P 500 has headed higher.
See here:
It also hasn't just been a short time period either:
Over the last 6 months Apple has been basically flat while the S&P 500 is up over 16%. That is a stunning change for one of the world's most profitable and best known companies.
We have written about the iPhone maker before and argued that such an outcome was not just possible but even likely. Still, even with this thesis the above underperformance is still pretty incredible to witness.
If you are interested you can read our last two pieces from November and September here and here.
Our previous arguments were that:
Apple was poorly placed to benefit from the mania for AI stocks, regardless of whether that excitement was justified or not.
Furthermore, we argued that the hardware maker would struggle to make incremental profits in a world where supply chains are decoupling and legal cases chipping away at many of Apple's most reliable income streams.
Even worse it was being attacked, financially and also business-wise in one of the most important markets: China.
Losing out on China is likely the worst development for Apple. The tech giant needs the country to get rich and buy ever more sophisticated and very expensive Apple products. Both halves of that thesis are currently in real trouble.
The Chinese economy is struggling mightily.
The Chinese state (and its hard working entrepreneurs) is trying expressly compete with the iPhone.
To this we should add something we did not predict which is the shuttering of Apple's car project named "Titan." This headline brought another wave of investor disappointment not so much because building cars was THAT important but more because it closes off a very large and ambitious route of further profits. It also demonstrates that, after spending a cool $10 billion no less, there are difficult tasks that even Apple cannot achieve.
We are less sure this last point matters overly. After all, the company is saving plenty of money but, as we pointed out last time, it does raise uncomfortable questions about where the next trillion dollar of market cap will come from.
That is question is still very open and investors are getting impatient.
Finally, it is important to note that the legal war has been broadened as well. The EU has finally forced Apple to allow the download of apps from regular websites, not *just* its app store. This is another instance where the headline is likely more impressive than the actual outcome but it also serves notice that the campaign by a thousand European regulatory cuts continues.
What to say about all this?
The first thing to say is that this really underlines the power of indexing!
The last stretch has really challenged the "Why not just buy Apple?" crowd when it comes to investing in the stock market. That was always a lazy argument and also one with serious hidden risks. Now the worm has turned and those folks may find it very hard to abandon their suddenly underperforming main (solo?) holding. That is the trap of anchoring and sunk costs.
It isn't so much that Apple isn't an impressive company anymore. It is (still) - very much so. Rather the issue is that Apple is an expensively valued stock that is struggling to find new sources of growth.
As we have argued before, the problem for hot growth stocks comes when, well, there is suddenly no growth. This can cause a dramatic reversal in their previously bullet proof reputation.
That may seem beyond self-evident but if growth falters and then the reasons for holding it suddenly evaporate for many sellers. Growth investors are obviously unimpressed which leads to a slowing rise, then gradually thr stock also no longer qualifies for momentum investors and finally, retail investors become disillusioned. This causes the virtuous feedback loop that caused the stock to take off to wrenchingly start going in the other, far more unpleasant, circle.
We bring this up partially because of our previous case against Apple and yet more because Apple isn't alone.
There are actually two ways it isn't alone:
The first is that it isn't alone is that (many) other members of the Super 7 group of Big Tech are struggling.
The other way Apple isn't alone is other stocks are rising to come and meet it at its (very elevated) fundamental valuation.
Let us deal with them in turn.
On then first, here is how a select group of the Super 7 has done since the October Fed meeting we always reference as the pivot point:
Quite the divergence!
It is purely dumb luck but we are amused at how just when we were starting to wonder if the Super 7 stocks would just keep ripping higher in 2024, they began to underperform.
Far more importantly still, all the attention right now is on the likes of the rocketship-like Nvidia and Microsoft but meanwhile the rest of the big tech companies are actually struggling mightily. The reasons for this are diffuse but the outcome is the same, many of last year's champions are not just struggling but they are even faltering.
This is hurting many regular people who bought these stocks because they thought they "can't miss" and would go up more and more resiliently than the market itself. That is a shame. It is also something that should be getting more press.
As a reminder, you can easily exclude the Super 7 companies from your portfolio using Pebble. If you wanted to see our original case, we wrote all about why you might do that here as well.
Furthermore, you can play with this theme here.
The positive for both the market and those invested in broad based (and cheap!) index funds is that the S&P 500 doesn't need Apple (or Tesla etc) anymore.
It has 493 companies helping it head higher....
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