## Friday, January 04, 2019 ... //

### Recent Apple (and FAANG) rally was the dotcom bubble lite v2.0

In mid September 2017, Gene Day wrote an e-mail to me that also contained a certain – somewhat excited – comment that "Apple would surely be the first company whose capitalization surpasses one trillion dollars". It's so incredible, it has such a momentum, he wrote, and so on.

On that day, the stock price was about $160 – now, after yesterday's 10% collapse and today's 3% rise so far – it is$147, significantly lower than what it was when Gene wrote that e-mail. And Gene was right (although Apple was lucky to get there before Microsoft). Apple was the largest company at that time, above $0.75 trillion, and it surpassed$1 trillion in August 2018, reaching the all time high $1.1 trillion in October 2018. Well, what has followed was less spectacular. The stock price is now at 61.8% (the golden ratio from the Fibonacci levels) of the all time high – the investors have seen a drop of nearly 40%. Those investors probably included Warren Buffett who came to Apple sometime in 2015. That's pretty late, Warren. Not only Apple has lost the$1 trillion mark. It is no longer a top three company – Microsoft, Amazon, and Google are more valuable than Apple right now.

It's interesting to look at the rather violent graphs of the Apple stock price. Note that so far, investors who bought in early 2016 may boast a 50% profit – plus dividends – and those who bought the Apple stock in early 2014 may brag about a 100% profit – plus dividends.

It's cool but compare it with a hype-free company such as Microsoft. It is now more valuable than Apple. Microsoft has come very close to $1 trillion but it hasn't quite gotten there. The profits from early 2016 and early 2014 are 100% and 200% – instead of Apple's 50% and 100%, as I said above. Microsoft won. A big deal. And Microsoft has managed to generate these amazing numbers with much less volatility. The Microsoft stock price almost looks like a savings account with a 20% annual interest rate. There's much more emotion in the Apple stock. Apple has been a cult, no doubt about it, while Microsoft has become a nearly opposite, cult-free company. But times may be changing. The Apple cult may be a lesson from the history books. It may have faded away. Steve Jobs was quite a driving force behind Apple. And it's rather amazing how well the company has been doing for so many years after his death – despite the absence of comparably innovative products. Like the light bulb or a combustion engine, the smartphone with nothing else than a touchable display was a real revolution. It has conquered the overwhelming majority of the mobile phones for at least 11 years – and most likely, this design will continue for a few more years if not decades. Also, when introduced in 2007, the iPhones were immediately hugely profitable. That's the main reason why I think that the comparisons of Steve Jobs and Elon Musk are silly. They may be comparably worshiped but Musk has invented nothing like the touchable phone – and nothing that would immediately produce huge profit margins. So when two men are doing the same thing, it's not the same thing. If you haven't heard, the yesterday's 10% drop followed a rare profit warning from Tim Cook, the post-Jobs boss of Apple. He complained about the dropping iPhone sales in China that must have something to do with the weak Chinese economy or the trade war. The predicted revenues would be almost 10% lower in China than previously thought. To be honest, he added, the developed markets aren't exactly rosy, either. That formulation still makes Apple look more healthy than it is. Clearly, Cook is trying to blame objective reasons. Apple is still the hottest company in the world, he suggests, one with the greatest potential. If Apple suffers, it's surely because everyone else does. Or at least every company selling in China has to have problems. Or at least every American company selling in China. But it doesn't seem to be the case. Apple's market share is dropping. Despite the hype, Apple's outlook looks worse than that of the average company. But so far, it would still be a blasphemy for an Apple person to admit that the company is below the average in any respect. Apple has largely switched to small adjustments of the iPhones (plus some services linked to the iPhones). It is trying to persuade iPhone owners to upgrade their hardware every year. But it is really a pointless waste of time and money. Tons of people used to wait in long lines whenever a new iPhone was released. Those stampedes are disappearing, too. The iPhones have always been extremely overpriced gadgets that depended on a mania. The company has gotten used to huge profit margins. As far as I understand the causal relationships between these matters, I think that this is a reason to expect lower profits in the future, especially after the market for iPhones has been largely saturated. Everyone who was really dreaming about an iPhone already has one – and even those that are 3 years old may be good enough. The older ones also have the home button and earphone jacks which may be significant advantages for many owners. This mania and cult is almost unavoidably a temporary phenomenon. And it seems to be ending for Apple. For the first time, in 2018, Apple has hit the limits of what the consumers are willing to pay. Phones that cost over$1,000 should be really stellar in all respects. But the new iPhones are not. Millions of typical consumers started to show that the prices are already too high. The game may be over. The increasing prices were Apple's simple recipe to counter the dropping number of sold units (Apple has stopped publicizing how many phones it has sold – that's almost a proof that those are dropping, and probably quickly so). But the prices cannot be arbitrary – in spite of the slogan "yes we can [pay any price to Apple]" that the Apple fanboys were taught to memorize.

The competition produces lots of phones that are stronger in many hardware aspects – and that cost 1/2 of the iPhones' price. This is something that Apple skeptics such as your humble correspondent have been saying for many years. But for the first time, even the former Apple cultists have been forced to think about this heretical idea. They need to think about the possibly overpriced iPhones because they're running out of money. The Chinese consumers are obviously more likely to run out of their money than the U.S. or Western consumers so that's where the problems start but it's clear that the problems are appearing or will be appearing in the West, too.

This disappearance of the "religious premium" isn't necessarily anyone's fault. I would say it's not a fault at all – on the contrary, it's correct when price ratios are fair – and because it's not a fault, I will not propose any "fix"! There is no "fix" that would turn reality into a surrealism again. Miraculous recommendations to revive the home button aren't really miraculous. It just seems to be a fact that the irrationally elevated iPhone prices will drift towards normal values, Apple's profit margins will shrink towards other producers' profit margins, and Apple's temporary religious advantage is probably ending.

Don't get me wrong. The Apple stock is no Bitcoin. From the current $147, it shouldn't drop to a "fair price of zero" anytime soon. Well, one reason is that out of the almost$0.7 trillion capitalization, $0.2 trillion or 30% is in cash that Apple has hoarded. The stock price shouldn't drop below$50 soon simply because when the Apple's cash is divided among the stockholders, each of them should still get $50 for a stock in cash! So we're really talking about a possible drop below$100 which would be a "somewhat realistic catastrophe".

Also, the Apple stock seems reasonably priced in terms of P/E which is 12 or so. That's utterly sensible and consistent with neutral expectations about the company's future. This P/E is very different from Tesla whose P/E is mostly minus one vigintillion – and rarely, when it makes a profit, plus one vigintillion. ;-)

But truth to be said, I do expect a decline of Apple. It has become too dependent on a single overpriced product in a market where the competition is huge. Dozens of companies can make a similarly persuasive product. What's harder is to sell them. The market has been saturated. Apple's strategies to slow down the devices and force the buyers to upgrade have been called out and they probably have to stop. Apple's "preplanned death of the iPhones" is illegal in France and it will probably have to be abandoned, too. Simple calls to "update every year" don't seem to be working.

I think that Apple needs to appreciate that it has been fortunate for a decade and buy some companies that have some real beef. Apple's potential decline has been likened to that of Nokia, basically Apple's predecessor as the corporate king of cell phones. What these metaphor creators are missing is that the Nokia stock still exists and it's been a rare IT stock that saw some 25% increase in the recent year (from €4.05 to €5.17 now) – from its "all time low" a year ago. I still hold some Nokia stocks.

Well, that's just another good reason why Apple should buy something like Nokia – whose capitalization is just above $30 billion. Even when Apple pays us, the Nokia shareholders, some$50 billion, it is still a tiny fraction of the Apple's hoards of cash. Nokia itself has survived – and not because of the dumb phones that are still around but they became nearly irrelevant due to the touch displays. Instead, Nokia bought Alcatel-Lucent and Bell's Labs some years ago. The Nokia Bell Labs are a great scientific research center which has produced some physics Nobel prizes (the transistor etc.), among other things.

And these days, Nokia is one of the top players that are introducing 5G/NR ("New Radio"), the mobile data networks that will replace the 4G/LTE networks we use today. The transition is already underway – and it may affect most of the world by the end of 2019 or 2020. Finnish Nokia and the smaller Swedish Ericsson are the main European players and holders of 5G patents. Nokia should get €3 from the patents for each gadget that has a 5G chip. For five years, companies like Nokia may be expected a 50% annual rise just because of 5G.

Meanwhile, Huawei is still arguably at the top of the 5G technology. Some people even claim that it's technologically one full whopping year ahead of Nokia and Ericsson. However, due to the Sinophobia, Huawei is given a hard time in the U.S. – and the U.S. is clearly promoting the same hostile, anti-Huawei policies across the Western world (our PM Babiš has banned Huawei phones in the government buildings, before he met the ambassador of China, and then it got murky). This is largely undeserved, I believe. I believe that the Huawei phones or 5G antennas don't spy on you. It sounds much more likely that in the environment of the anti-Chinese racism, someone simply wants to damage China and Huawei is Chinese. But I can't really know for certain. With such worries, it could be a good idea to wait for Nokia that may need extra months to catch up with Huawei's 5G technology...

At some moment, Nokia survived by buying the producer of these mobile data antennas – to become a top player in the ongoing 5G transition now. These network gadgets are responsible for some 90% of Nokia's profits right now. And that's true despite the fact that HMD, a brotherly Finnish company, began to produce quite some amazing Nokia-branded Android One phones again. Their market share is going up hugely. Nokia should be getting "dozens of dollars" for each Nokia-branded phone in royalties. After some great machines such as Nokia 7.1, they should introduce Nokia 9 Pureview by the end of January. That beast has five Carl Zeiss cameras on the back side – Pureview is what you could remember from the most powerful photographic Lumia phones.

Apple should buy some "other business" just to survive. But it may very well be the same business – Nokia including the network gadgets. In fact, Apple seems hopeless from the 5G perspective, too. It plans to introduce no iPhones with the 5G capability in 2019. So Apple, the most worshiped phone maker, won't be among the first ones that will speed up your mobile data by a factor of 100 (such phones already exist but they're not sold en masse yet). The reason is that Apple relies on the 5G chips by Intel and Intel has some trouble to make the chips work at 7 nanometers, or whatever they need, so Intel has lost the cutting edge in 5G, too. I guess that Huawei and/or Samsung and/or Qualcomm or another Asian producer is actually capable of making the 5G chips to be placed inside phones now – Intel's chips are so far overheating.

Alternatively, Apple may escalate its "pure hype approach". A great strategy to send the Apple stock price towards zero within a year or two would be to buy Tesla along with a few similar worthless companies. Tesla dropped by almost 10% a few days ago, too. (If it is below $359 by the end of February, some$1 billion debt has to be paid in cash and not stocks, a more harmful option for Tesla.) From the beginning of the year, it had to slash the car prices by $2,000. So the profit margins, if they existed at all, will shrink or become negative. On top of that, the cars will still be less attractive than a month ago because the EV subsidy has been reduced from$7,500 to $3,750 – the price cut only covers about one-half of that loss. By the end of the year, the rest of the subsidy will disappear in the U.S. In Norway and the Netherlands, the new electric Jaguar i-Pace has outsold Tesla cars. You may find news stories about it. It's comparable to the SUV-like Tesla model but the Jaguar has more power. The competition is already here. Within a year or so, Porsche will introduce its Porsche Taycan, a truly aggressively looking electric sports car. The times when Tesla cultists could have dismissed the talk about the competition are already over. I urge TRF readers to sell all their Tesla stocks soon – you get over$300 now.

Let me return to the title. I wrote that Apple has seen a bubble that has grown and that has burst. In fact, I believe that the very fact that the Apple capitalization has reached $1 trillion was largely driven by the religious cult. As an apparent member, Gene Day has unmasked this cult very clearly. He was impressed by the "momentum". It seems clear to me that he "wanted" the capitalization to surpass$1 trillion. And he – and other Apple fans – may have helped this to happen by buying the stock even in the recent year. But such non-meritocratic motivations just overstate the stock price – but the overinflated stock price is guaranteed to fall later, and it did.

Meanwhile, no one gave a damn whether Microsoft reaches the psychological threshold of $1 trillion, and accidentally, it hasn't quite done so – despite the fact that it's the most valuable company today. It's right because the Microsoft stock's valuation is almost certainly more reasonable at all times. Apple is or was a cult. But to a lesser extent, this unnatural growing bubble has affected all the FAANG stocks. If you don't know the acronym, FAANG is the acronym coined by Jim Cramer of CNBC for Facebook, Apple, Amazon, Netflix, and Google – although the last company's key parent is currently called the Alphabet (that would make the acronym FAAAN – many of them obviously want to start with an "A" in order to be at the top of alphabetical lists). You should ask the question: Why should we clump the FAANG stocks at all? There is an obvious answer. These stocks are being clumped because someone wants to sell the story that these are stocks whose price is going to infinity in the future utopian world and you should buy them at any moment and any price, just like if these stocks were the Bitcoin in 2017! And to some extent, this is what was happening. The very existence of this acronym implied that lots of investors were mindlessly buying these stocks – and therefore their prices were unavoidably overstated! In the late 1990s, everyone would be buying DotCom companies. In recent years, everyone was supposed to buy FAANG. The extent of the mania was less intense in the case of FAANG but the qualitative mechanism is exactly the same. Someone invents a "mantra" and this mantra's main impact is for lots of people to worship it and mindlessly buy all stocks that "agree" with the mantra, regardless of the price! As Market Watch wrote, stock market dogs (underestimated stocks) eventually have their day. A long-term or fundamental value investor should really buy dogs, and not overhyped stocks, because they do better in the long run. Well, I think that the reason is simple. A stock's being a dog really means that it's undervalued and you should buy stocks when they are undervalued and sell them when they are overpriced, not the other way around! This is a recipe that is generally good for you. But it is also good for the market because the investors and traders should play the role of determining the "right" prices and helping to optimally allocate the capital. I think that this is one of the most obvious lessons of the financial markets that are being deliberately obfuscated by tons of irrational and quasi-religious nonsense promoted by assorted cults. Lots of people want to join cults and they never seem to learn the basic lessons. At the end, most of those people lose lots of money. Disclaimer about the overall markets: In the recent month, I increased my exposure to stocks by 30% or so. It seemed obvious – and it still does – that the stocks were generally undervalued and it was the best opportunity to buy in at least 5 years. Today, the markets are growing because China has lowered capital reserve requirements for banks, which released more than$100 billion; Fed's Powell said he plans to be "patient" before raising rates again; the U.S. jobs reports humiliated the modest estimates, and few more pieces of good data appeared. I think we're almost certain to avoid a "global recession" for a year or two or more – and if such a threat existed, the central banks will make steps that will improve the situation. I guess that the "pundits" will tell you that it's a time to buy after they buy themselves – when the prices will already be significantly less attractive than yesterday.