Why Apple Shareholders After the Earnings Cut Shouldn’t Be Too Worried

If you’re an Apple shareholder who wondered after last week’s stellar earnings report why your stock value is falling rather than rising, the reason given – that chip shortages will weigh on the near-term outlook. – may not sound good enough. For a trader looking at every short-term opportunity to move the portfolio’s money to where the next quick dollar is likely to be, this stock shouldn’t be “selling on the news” any more. Longer-term investors, however, may want to consider a recent fact about the company and negative headlines: Apple has overcome just about all of the short-term “sell” headlines these days. past years to become a company of more than 2 trillion dollars.

Trump’s trade war with China? No problem. The surprise decision to stop offering advice on iPhone units? Much ado about nothing because the iPhone super cycle has arrived anyway. When it comes to the global semiconductor chip shortage currently cited by Apple, it might be wise to keep in mind that Apple has a long history of being fairly conservative with its outlook – the formal forecast of profits still have not returned. And one more thing: Tim Cook was elevated to CEO after Steve Jobs because of his mastery of global logistics.

“Let’s face it, if Apple is having trouble getting chips, then every other company on the planet will have 10 times these problems,” said Nick Colas, co-founder of DataTrek Research. “If you are really worried about chip supply, you want to own Apple because it is on the front line in every chip factory.”

But there is a bigger question for Apple and the rest of the market: how strong will the next stage of market growth be?

According to Colas, the immediate market outlook does not necessarily call for buying down after the big tech sales. Seasonality is an immediate risk, with market history showing that the early August period is volatile for the VIX Volatility Index.

“It’s a valid business question, where to go for the trading dollar in August,” Colas said.

Since 1990, the period of early August is when the VIX peaks. This is partly due to the lighter volumes on the market during the summer. “It’s a low for cash, when people are on vacation … a lower number of people trading and more volatility will result in any news. I tell clients to be careful,” he said. .

From Wednesday to Friday of last week, the S&P 500’s trading volume was below its 30-day average.

For the short-term trader, a rotation of leaders from large caps to small caps represented by the Russell 2000, which Colas has described as being “significantly oversold” since its scorching streak in early 2021, might make sense. “Small caps went parabolic in March and April and haven’t worked since because they got a head start,” he said.

That makes them, at least statistically, based on 100-day returns, cheap right now.

But for investors not playing the market for a quick deal, Colas says disappointing trades after earnings from Apple, Facebook and Microsoft shouldn’t weigh too heavily. Amazon was the outlier in actually missing revenue expectations rather than posting a big pace, making a massive news sale a “fair” reaction, according to Colas.

It’s also important to remember that the big beats of the rest of big tech were already embedded in most stocks, as they had strong June and July based on the market guessing – only profits from the market. second quarter would be stellar. “The market was pushing the stocks up in the quarter. The market sniffed at the surprise and they all happened, and when you see stocks rallying to quarterly profit, it’s hard to keep that up. to the news “unless there is a lot of good news and advice,” said Colas. “This is the normal behavior of capital markets.”

He comes back to an important piece of data to assess the strength of these companies: they have doubled their profitability over the past two years. “Which is amazing,” he said. And that gives it more comfort in the long run. “I don’t see any change. Big tech is still the place to be.”

He cited two reasons.

Even though these companies have doubled their earnings growth, he doesn’t think they are near the peak of their earnings. “It’s just a much higher base to build on.”

Second, these companies have definite advantages in industries and do not directly compete in a zero-sum game in many areas of strength.

These companies have increased their profits so much because the pandemic has changed consumption patterns, made us all even more tech-centric, and the market has made a lot of money betting on that by playing out exactly the way it is. did. But now the big question for big tech isn’t whether their dominance is threatened – although multiple antitrust battles are looming – it’s just a matter of how much leeway they have to maintain the growth rate of companies. higher profits.

“Tell me what you would pay for a company with 30% ROI and 10-15% structural growth, and who can do that for a decade?” What is the multiple? Is it 30 times or 40 times? I have no idea, “Colas said,” but I know it’s not 20 times. “

Apple was one example of this cluster of multiple price-earnings concerns. It trailed the rest of the tech giants for years, seen as a hardware vendor and weighed down by that view of the market until the service industry soared during the pandemic and the market cap of 2,000 billion dollars is given to the company. And again this year, it was “the only one lagging behind”, in Colas’ words, because its return on profits since the start of the year was around 10% compared to around 30% for Facebook and Microsoft.

Apple was also tracking the S&P 500, ahead of earnings. One reason: demand has been so nil that investors are rightly concerned that publishing good results will become increasingly difficult. But, Colas said, it could also mean it has the most leeway, even in the short term, as a new iPhone launches in the fall and back to school increases spending on consumer tech.

The larger story of global growth that the entire stock market is tied to is not a lock. In fact, amid the panic over inflation earlier this year and expectations that the 10-year Treasury yield would rise, he did the opposite. “The market fully understood that growth peaked in the first quarter and started to decline at the end of the quarter,” said Colas.

The rate story was wrong, but slowing economic growth is now higher on the list of investor concerns for a US market with high price-to-earnings ratios. Big tech makes up 23% of the S&P 500 and that means whatever the market decides about its high valuations, it will weigh heavily on US equities overall.

But investors don’t have as many good choices globally. With the situation in China between the government and its major companies causing massive losses in recent weeks, there might be some business opportunities, but emerging markets are no place for anything other than trade. And while there are potential opportunities in other international games like European financials, it will take time for rates to move in a direction that benefits these stocks.

“What’s left? It’s the United States and the top of the cap table,” said Colas. “This is what you must have. Always with the same names again.”

Looking at sector weights from the 1970s through to the 1990s, he says there was never a time when five companies had more weightings. “These are just 5 names, and it’s not like when Exxon was at its peak in the S&P. It was a commodities game. These companies have huge barriers to entry and very structural returns. students.”

Even with these benefits, trying to figure out what their earning power will be after the pandemic, or at least as the world goes from the worst of the pandemic to the lingering effects, is the biggest problem for big tech.

“What is a fair growth rate for 2022? It’s difficult,” said Colas.

For Alphabet – the only one of the big names in tech to report an increase after its profits last week – and for Facebook, which reiterated an early warning of slowing revenue growth, there’s the cyclical nature of the advertising market. to rely on, and it was not. everything changed in recent decades. Apple, however, is more difficult, because although it has progressed beyond the history of the iPhone and made its services business a huge engine of growth, the demand for hardware has increased.

For Amazon, Colas noted that the share of e-commerce demand fell from 17% to 24% in the second quarter of 2020, then fell to 20%. And every percentage point in that band has huge leverage on Amazon’s business model – in fact, he pointed out that was why Amazon was “stuck in this band” for nine months before it it does not take back its profits. From October 2020 to June this year, Amazon had bounced back but didn’t raise bids like other names before pre-profits ended. Since the beginning of the year after the fall in profits, the title has barely retained a gain, just under 3%.

What just happened in all of these stocks was a peak in earnings, but it’s far from a peak in earnings for these companies, Colas said. The concept of peak earnings, which is of concern to investors, implies that there is a point in the cycle when a company shows its highest earnings growth in absolute terms. “This is what peak revenue is for, and no large tech company comes close to peak revenue in absolute terms,” Colas said. “Because they keep growing and their profit leverage is huge. “

It is more likely to be a buy in the future after the sell in the news wears off.