Shares in Apple, Inc. (tkr: AAPL) have fallen approximately 6% since last Wednesday. This fall is presumably the result of several interesting new stories that have broken over the last week. Last Thursday the National Enquirer published several pictures of Apple's founder, Steve Jobs, looking frail and exhausted as he left the Standford Cancer Center. Along with the pictures, the Enquirer ran an article claiming that Jobs has just six weeks to live. Then, on Friday, the Wall Street Journal reported that the Justice Department and FTC have begun to investigate whether Apple's recent changes to its app store, which require that application developers offer an "in app" option to purchase content, giving Apple a 30% cut, violate antitrust laws.
According to The Street, over 100 hedge funds have closed out or reduced their positions in Apple recently, while about 30 funds took new positions or extended their existing positions in the company. Though there is clearly not a consensus among hedge fund managers as to the future of Apple's share price, three times as many hedge funds are bearish and have sold their long positions. So, which side is right, the bulls or the bears?
Apple's fundamentals have not changed over the last week; it still has about $60 billion in cash, it did not lower its quarterly guidance and it's still a profitable company. The recent sell-off is simply due to speculation about Apple's future, a future which I consider to be as bright as ever.
Yes, Jobs is sick and, if the Enquirer is correct, he may die soon. His death would be a huge loss to the tech industry as a whole. I don't want to belittle Jobs's possible death - he is a hero of mine - but I don't think it would severely impact Apple's operations. On January 17th of this year, Apple announced that Jobs would be taking a medical leave of absence so that he could focus on his health. According to the announcement, Jobs remains CEO and is still involved in strategic decisions, but Tim Cook, Apple's COO, is responsible for day-to-day operations. This was not the first time that Jobs took such a leave of absence - on January 14, 2009, Apple issued a press release strikingly similar to the one from this year. Apple did just fine in 2009, and it's doing just fine now. Steve Jobs is not Apple.
While we don't know who would replace Jobs if he were to leave Apple for good, three possible choices come to mind: Tim Cook, Peter Oppenheimer - Apple's CFO, and Jony Ive - Apple's Sr. VP of Industrial Design - all of whom have been with Apple for over a decade. It's likely that Cook would be tapped as CEO, especially considering that Jobs has selected him twice to run day-to-day operations. With the operational aspects of Apple in safe hands the question arises, "who would replace Jobs as the visionary leader of the company?" The answer is clear, Jony Ive. Ive was the lead designer of the iMac, PowerBook, MacBook, iPod, iPhone and iPad. In other words, he has worked on every major Apple product released in the last decade. In short, even if Jobs left Apple, it would still be competently manged and capable of producing innovative, market-leading products.
The second major point of speculation that drove the decline of Apple's stock was the Wall Street Journal's story that the DOJ and FTC have begun a preliminary investigation into Apple's recent changes to its app store. There is little reason for investors to fear such an investigation - no outcome would cripple the company. If the government begins a full-bore antitrust investigation Apple will rack up millions in legal fees, but that's just a drop in Apple's $60 billion bucket. In the worst case - the unlikely event that the government concludes that Apple violated anti-trust laws - the government would probably fine Apple for the violation, require it to refund the 30% it gets from in app subscriptions and require it to change its app store policies to allow apps without in app subscriptions. These punishments would not hurt Apple much in the long-run. First, Apple can afford a fine. Second, requiring a refund of in app subscriptions/cutting off the in app subscription option would simply deny Apple a revenue source which it did not have until this month anyway. In short, the worst case is that Apple loses a source of revenue which didn't exist until this month, and it is forced to spend some of the cash it has available in its huge warchest.
The Play:
Disclosure: I have a long position in Apple which I have held for several years.
At this point, I would wait a few days to see if Apple's stock continues to slide. Once it bottoms out, take a long position and hope that it continues to have superlative performance.
Watch the media: Apple's annual shareholder meeting is tomorrow. You may get some guidance from the meeting.
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