Skip to main content

Making sense of Apple stock's roller coaster ride

By Aswath Damodaran, Special to CNN
updated 9:46 AM EST, Mon January 28, 2013
Apple is perhaps still the most valuable franchise in the world, says Aswath Damodaran.
Apple is perhaps still the most valuable franchise in the world, says Aswath Damodaran.
STORY HIGHLIGHTS
  • Despite record quarterly profit, Apple's stock price plunged 12% recently
  • Aswath Damodaran: How can a valuable company fall from grace so quickly?
  • He says Apple has acquired investors with wildly divergent views about the company
  • Damodaran: When a stock becomes a pricing play, investors look past real value

Editor's note: Aswath Damodaran is the Kerschner Family Chair professor of finance at the Stern School of Business at New York University. He is the author of four books about valuation, including "The Dark Side of Valuation."

(CNN) -- If you have been an Apple stockholder last year, you probably feel like you have been on a roller coaster.

Apple began 2012 by attaining the largest market cap in the world, with some analysts predicting that it would cross a trillion in market value. The stock price hit $700 in September, around the introduction of the iPhone 5. But in the weeks after, disillusionment set in and the stock price dropped to about $500 by the end of the year. Recent earnings disappointment has plunged the stock some 12%, and panic seems to have set in.

How can a company fall from grace so quickly, especially when it still possesses enviable profit margins and perhaps the most valuable franchise in the world?

Aswath Damodaran
Aswath Damodaran

The answer lies in recognizing that a market price is set by demand and supply, which, in turn, are driven not only by underlying value but also by other factors including hope, hype and momentum. Apple is particularly susceptible to these "nonvalue" forces.

Apple has acquired a motley collection of investors, with wildly divergent views about the company and its future. There are growth investors, who were attracted by its capacity to come up with new products and conquer new markets. There are momentum investors, who were drawn by the ever-rising stock price (at least a year ago). And there are value investors, who were enticed by its capacity to generate and pay out large cash flows.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



The ubiquitous presence of Apple products has made each of these types of investors an expert on the company's future. Thus, investors who would not have dared forecast the futures of GE and Exxon Mobil -- when they were the largest market cap companies in the world -- feel no qualms about prognosticating Apple's future.

You may wonder: So what?

When a stock becomes a pricing play, investors no longer pay attention to underlying value and instead focus on trivial stories, such as the lack of crowds at the Shanghai store for the introduction of the iPhone 5. Investors react in exaggerated (and herd-like) fashion to small, often insignificant surprises.

Investors sour on Apple
Samsung takes a bite out of Apple
Eye-popping earnings from Apple

Given that you and I as investors can do little about the crowd insanity that characterizes Apple's stock today, what should we do?

You can try to play the pricing game and get ahead of momentum shifts, a dangerous game that I, for one, have neither the stomach nor the expertise to play. Alternatively, you can look past the price at Apple's underlying value, based on its capacity to generate growth and margins over time.

At the end of last year, I estimated a value of roughly $609 per share for the company. While this valuation predates the most recent earnings report, I see little reason to revisit it, since the revenue growth and margins that Apple reported are actually in line with what I had used in my valuation.

If you do decide to buy Apple's stock, as I did last week, remember that the pricing game has its own internal dynamics that may cause the price to move further away from value, before there is a correction.

So, it is entirely possible that your "value play" in Apple could yield disappointments in the near term. To be successful, you have to be able to hold the stock through these disappointments and to stop listening to equity research analysts and Apple experts in the meantime.

As for the company, it is time for a reboot.

I feel sympathy for CEO Tim Cook, who has big shoes to fill. But there are three things that Apple can do to put itself back on even keel.

First, the company has to regain credibility with investors, both in terms of guidance that it provides on upcoming earnings and the information it makes available about its product plans.

Apple has acquired a reputation for lowballing its expected results before earnings reports. Instead of making it easier for the company to beat expectations, it has led instead to markets paying little heed to the guidance. Also, Apple's secrecy about new products and strategies might be a great marketing strategy, but it creates an information vacuum, which is filled with rumors and fantasy.

Second, the company has to stop trying to be all things to all investors and make its stand on whether it sees itself more as a growth company or a more mature company. By making the choice to be a mature company, Apple is not forsaking growth, but it is signaling that its emphasis will be on protecting the profitability of its current franchises first before seeking out new growth opportunities. By doing so, it may be able to create a more homogeneous investor base that is less likely to be at war with itself.

Third, once Apple makes its stand as a growth or mature company, it has to behave consistently. So if it decides that it is a mature company, it should return more cash to its stockholders.

The tax code is tilted toward debt, and a company that can afford to borrow money that does not is not using that tax benefit. So perhaps in the future, the company should think about using a little debt to fund itself.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Aswath Damodaran.

ADVERTISEMENT
Part of complete coverage on
updated 8:42 AM EDT, Mon August 18, 2014
The former U.K. prime minister and current U.N. envoy says there are 500 days left to fulfill the Millennium Goals' promise to children.
updated 9:10 AM EDT, Mon August 18, 2014
Julian Zelizer says the left mistrusts Clinton but there are ways she can win support from liberals in 2016
updated 7:49 AM EDT, Tue August 19, 2014
Peter Bergen says the terror group is a huge threat in Iraq but only a potential one in the U.S.
updated 1:34 PM EDT, Sat August 16, 2014
Mark O'Mara says the way cops, media, politicians and protesters have behaved since Michael Brown's shooting shows not all the right people have learned the right lessons
updated 11:23 AM EDT, Sun August 17, 2014
Retired Lt. Gen. Mark Hertling says the American military advisers in Iraq are sizing up what needs to be done and recommending accordingly
updated 3:41 PM EDT, Fri August 15, 2014
Marc Lamont Hill says the President's comments on the Michael Brown shooting ignored its racial implications
updated 5:46 PM EDT, Fri August 15, 2014
Joe Stork says the catastrophe in northern Iraq continues, even though many religious minorities have fled to safety: ISIS forces -- intent on purging them -- still control the area where they lived
updated 6:26 PM EDT, Thu August 14, 2014
Tim Lynch says Pentagon's policy of doling out military weapons to police forces is misguided and dangerous.
updated 9:15 AM EDT, Fri August 15, 2014
S.E. Cupp says millennials want big ideas and rapid change; she talks to one of their number who serves in Congress
updated 7:57 PM EDT, Thu August 14, 2014
Dorothy Brown says the power structure is dominated by whites in a town that is 68% black. Elected officials who sat by silently as chaos erupted after Michael Brown shooting should be voted out of office
updated 7:49 AM EDT, Thu August 14, 2014
Bill Schmitz says the media and other adults should never explain suicide as a means of escaping pain. Robin Williams' tragic death offers a chance to educate about prevention
updated 11:05 AM EDT, Fri August 15, 2014
Nafees Syed says President Obama should renew the quest to eliminate bias in the criminal justice system
updated 4:24 PM EDT, Thu August 14, 2014
Eric Liu says what's unfolded in the Missouri town is a shocking violation of American constitutional rights and should be a wake-up call to all
updated 3:22 PM EDT, Wed August 13, 2014
Neal Gabler says Lauren Bacall, a talent in her own right, will be defined by her marriage with the great actor Humphrey Bogart
updated 6:56 AM EDT, Fri August 15, 2014
Bob Butler says the arrest of two journalists covering the Ferguson story is alarming
updated 4:35 PM EDT, Wed August 13, 2014
Mark O'Mara says we all need to work together to make sure the tension between police and African-Americans doesn't result in more tragedies
updated 4:06 PM EDT, Mon August 18, 2014
Pepper Schwartz asks why young women are so entranced with Kardashian, who's putting together a 352-page book of selfies
updated 7:08 PM EDT, Wed August 13, 2014
Michael Friedman says depression does not discriminate, cannot be bargained with and shows no mercy.
updated 8:51 AM EDT, Tue August 12, 2014
Mary Allen says because of new research and her own therapy, she no longer carries around the fear of her mother, which had turned into a generalized fear of everything
updated 3:59 PM EDT, Tue August 12, 2014
Gilbert Gottfried says the comedian was most at home on the comedy club stage, where he was generous to his fellow stand-up performers
updated 4:54 PM EDT, Tue August 12, 2014
Iris Baez, whose son was killed by an illegal police chokehold, says there must be zero tolerance for police who fatally shoot or otherwise kill unarmed people such as Michael Brown
updated 8:46 AM EDT, Tue August 12, 2014
Maria Cardona says as he seeks a path to the presidency, the Kentucky Senator is running from his past stated positions. But voters are not stupid--and they know how to use the internet
updated 10:19 PM EDT, Tue August 12, 2014
Gene Seymour says the shock at the actor and comedian's death comes from its utter implausibility. For many of us over the last 40 years or so, Robin Williams was an irresistible force of nature that nothing could stop.
updated 3:51 PM EDT, Tue August 12, 2014
Soledad O'Brien says the story of two veterans told in a documentary airing on CNN shows the challenges resulting from post-traumatic stress
updated 11:25 AM EDT, Tue August 12, 2014
LZ Granderson says we must not surrender to apathy about the injustice faced by African Americans
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT