The following commentary appears in the latest quarterly letter from Turner Investments. It is a response to a question submitted by David S. Newcomb, director of portfolio management for Sterling Investment Advisors, who wanted to know whether Apple Inc.'s struggles meant its days as a growth company were over. To read more of the quarterly letter, here. .
Apple's recent struggles have been widely chronicled by the business press.
Apple's share price is down about 30% from its peak last September, and sales of its iPod and Macintosh products are declining. Although it is difficult to pinpoint exactly why Apple has looked uncharacteristically average lately, some observers have attributed it to the death of Steve Jobs, the company's brilliant and innovative chief executive; a lack of new market-changing consumer products; increased competition from companies such as Google Inc. and Samsung Electronics Co. Ltd.; and the company's now-massive size.
After regularly smashing earnings expectations, creating markets for new devices and managing market transitions well, Apple has become, to some degree, a victim of its own success. It has had a difficult time living up to inflated expectations, even though it has continued to produce robust earnings. For example, after posting profit of $13.1 billion in the fourth quarter — the highest quarterly profit of any technology company — and record sales numbers for iPads and iPhones, Apple's stock price fell.
At any rate, it is important to keep in mind that Apple has never moved all that quickly in introducing new products. For example, seven years elapsed between the introductions of the iPod and the iPhone. And Apple has never been concerned with short-term fluctuations in the stock market or its stock price at the expense of product development.
Instead, the company has made sure that its products are light years ahead of the competition before marketing them. With big markets such as home entertainment awaiting — and rumors of new products such as an Apple “smart” watch on the horizon — the company is likely poised for a fruitful new burst of innovation.
What's more, Apple stock is more affordable than it has been in some time. In comparison with the S&P 500's average price-earnings ratio of 15, Apple's P/E is 10.5, representing a rare buying opportunity for a proven growth stock.
Apple's sheer size — annual sales of more than $150 billion — likely will preclude it from posting the eye-popping growth numbers of recent years. But we don't think that means its days as a growth company have ended, either.
In light of Apple's resources, technical sophistication and record of innovation, it is unwise to relegate Apple to the scrap heap of growth-investing history.
Bob Turner is the chairman and chief investment officer of Turner Investments.