Revisiting the Endless Apple/Wall Street Disconnect

August 25th, 2015

Global stocks are in freewill, in very large part over fears about economic slowdowns in China. Since Apple has become more and more dependent on China for sales growth, its stock has been in “bear” territory for days, losing a large portion of its recent gains. Some expect the stock to just keep falling because, naturally, there must be troubles in China and Apple must therefore suffer for it.

Except that the facts appear to point in a very different direction.

So on Monday morning, Apple CEO Tim Cook sent an email to Jim Cramer, the seriously outspoken financial pundit at CNBC, which attempts to put things in the correct perspective:

As you know, we don’t give mid-quarter updates and we rarely comment on moves in Apple stock. But I know your question is on the minds of many investors.

I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.

Obviously I can’t predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge.

The bear market has been blamed on the decision of the Chinese government to devaluate its currency, the yuan, in order to deal with an economic slump. If you are heavily invested in stocks, this has been a difficult summer for you, although the market recovered somewhat through Monday.

I understand that people are fearful of Apple’s performance as a result of the China connection. And fear, or, for that matter, unreasonable optimism, can fuel huge changes in a stock’s price. Apple has taken hits in the past because of unrealized fears. Consider what happened in the wake of the release of the iPhone 5 in 2012. Without any evidence to justify the prediction, some tech and financial pundits decided that Apple must sell ten million of them during the first weekend on sale.

When Apple happily touted sales of five million units, that they could have sold more if enough stock was available, the media declared it a failure. Not only was it a record for the iPhone, it was a record for the entire mobile handset industry. Samsung, despite claiming huge sales of Galaxy smartphones from time to time, has never been able to sell five million of them in a single weekend, ever.

In any case, there were unfounded rumors later in the year that Apple had cut back in iPhone orders, thus presaging poor sales. Instead, record results continued to be reported, and Tim Cook, in one call with financial analysts in 2013, schooled them about the obvious fact that you can’t take a single supply chain metric and apply it to actual sales.

Apple’s stock price continued to fall through 2013, and even the slightest fudge factor in sales was taken as an indication that Apple was on the rocks, and Tim Cook was in over his head.

In those days, Apple said nothing about being beaten up on the stock market. I presume they wanted to stay above the fray and not get involved in a war of words with the media, who’d always get the last word.

This time, Cook wasn’t shy about emphasizing the positives without actually revealing any sales figures. So in referring to “strong growth,” accelerated iPhone activations, and the “best performance of the year for the App Store in China during the last 2 weeks,” he’s addressing all the key concerns. By saying that he continues “to believe that China represents an unprecedented opportunity over the long term,” clearly Apple is feeling vindicated in the decision to focus heavily on that country for future growth.

Unfortunately, this disclosure could have unwanted consequences. There’s a published report claiming that Cook might have violated SEC Regulation FD with his statement, which is evidently about publicly-traded companies releasing material company information privately without also releasing it publicly. Whatever that means, since the statement was quoted publicly. Besides, I hardly expect the SEC to rake Apple over the coals over this, whether it’s a transgression or not. But I do see fear-mongering in full force.

As most of you know, I am not an economist, and I don’t play one on TV or radio. I wouldn’t presume to predict what’s going to happen in China, or whether it’s a short-term problem or one that’ll persist in the long term. But for Apple, it’s all about selling hardware and services, and if sales growth continues to hit their internal goals, the overall economic picture might not be so significant. Sure, perhaps growth will slow somewhat, but Apple obviously doesn’t operate in one country.

As far as I’m concerned, regardless of potential SEC consequences, Tim Cook made the right call to send that email. Investors who were spooked over the company’s prospects may, perhaps, feel a little more confident that the company is not suffering, and that future growth targets may indeed be hit and exceeded. Remember, too, that the stock market is very much about psychology, and believing in bad news doesn’t necessarily mean anything’s wrong.

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4 Responses to “Revisiting the Endless Apple/Wall Street Disconnect”

  1. Constable Odo says:

    I’m definitely happy Tim Cook finally did some damage control. FUD about Apple is simply running rampant. There have to be lots of companies depending upon China but it seems only Apple is going to be thrown to the wolves and that’s ridiculous. Consumers have been begging Apple to open stores in China to buy products and I doubt they’re going to change their minds overnight. I’m not saying Apple can’t lose sales but this reasoning that Apple will be destroyed from no one buying Apple products in China is crazy. If anything, Apple should be less affected by a China slowdown than many other companies. Tim Cook has gone all-out in making good relationships with China carriers and the factories and yet these Wall Street crazies are saying Apple is going to get slaughtered in China. That’s simply not going to happen.

    However, I do with Apple would try to broaden its product line and not have to rely so heavily on iPhone sales. I understand why Apple does what it’s doing but it appears to make investors shy away from the company and that makes me nervous. Apple has to find at least one more product to somewhat balance the iPhone. It probably won’t be easy. There’s almost no hardware products anywhere I can think of that compare to smartphones in terms of profitability and sales numbers.

  2. Viswakarma says:

    Wall Street is “Anachronistic”!

    It has perverted the original purpose of individuals and organizations buying and holding stocks in a company for the purpose of getting dividends from the company.

    Wall Street has become the Las Vegas of the East, and perhaps either needs to be shut down or ignored!!!

  3. Even if Tim gets fined I bet it’s far less than the billions the stock would have shed.

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