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Home Publications Blogs Beat the Press Naive Investors Understand Apple's Stock Price Better Than the NYT's Reporters

Naive Investors Understand Apple's Stock Price Better Than the NYT's Reporters

Friday, 19 April 2013 04:35

The NYT had a piece on the precipitous fall in the price of Apple's stock since last September. It explained the decline in part by the fact that an unusually large portion of its stockholders are individual investors. These investors were overly enthusiastic about the stock last year and now, according to the piece, excessively pessimistic. It tells readers;

"At its current price, investors are betting that Apple will grow more slowly than the average American company. And they are ignoring the enormous pile of cash that Apple has built up, which it could hand out to shareholders tomorrow if it wanted."

These two sentences actually are in direct contradiction. Apple has accumulated an extraordinary amount of cash precisely because it does not see good investment opportunities. That is good reason to believe that its profits will grow less rapidly in the future than other companies. Rather than ignoring this cash, investors are likely focused very much on the fact that Apple does not seem able to find good places to use its money.

There is one other point that is worth making about the stock price. It is plausible to tell a story in which Apple's stock price would be driven to extraordinary levels by ill-informed individual investors. (Although large investors could counter this run-up by shorting Apple stock.) It is less plausible that the price would be driven to irrationally low levels.

Institutional investors do own large amounts of Apple stock and in fact they have considerably less money in Apple today than they did eight months ago. If they viewed Apple stock as being seriously under-valued at its current price then they would rush in to take advantage of a bargain. The fact that this does not appear to be happening suggests that it is not just individual investors who view Apple's stock price as being too high. The big institutional investors must share this view.

Comments (4)Add Comment
Patent Agression
written by Scott Dunn, April 19, 2013 7:49
Apple has been poisoning it's own well through patent aggression. Customers are getting turned off by their antics in court and their pursuit of giant settlements against Samsung and Android. Apparently, customers really like Android.
written by JDM, April 19, 2013 11:48
Although the patent stuff is annoying, I don't think it has much effect on their sales or price. The problem they have is they have had a few years with some great new and very desirable products and now they've just got a new model each year. But they're good enough already. So fewer people are going to rush to buy each new model.

And no one sees anything really big in their near future like the iPad, so why should we expect their price to be so high?

Steve Jobs
written by MM, April 20, 2013 7:14
Steve Jobs was the brains Apple and. The absence of his brilliance will tell long term on the company. No great innovations from Apple since Jobs passing, and none forthcoming - despite the huge stockpile of cash.
Financial leverage & Operational Leverage
written by Tim Bassett, April 21, 2013 7:19
I'm not sure lack of investment opportunity is entirely the cause of Apple's cash pile. I did some work on corporate risk a while back looking at the relationship between financial leverage and operational leverage. In general companies with high operational leverage such a tech companies have negative financial leverage while companies with low operational leverage run high financial leverage. Given that technological improvement is increasing operational leverage all the time we should expect a degree of structural corporate deleveraging (another reason not to get too excited over Government deficits)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.