Apple and Intel
You may have noticed that both companies haven’t been doing too well in the stock market lately. Intel’s dropped by about a third; Apple by more than half.
The mere fact that they dropped probably shouldn’t concern you too much (unless you owned it, in which case you should be concerned as to why you did); they were both overvalued. Why they dropped when they did, and how that affects other stocks, should scare the hell out of you if you’re an investor.
The case of Apple
If you read the media accounts, Apple was so low it was fending off sewer rats until Steven Jobs Superstar came back, and everything became wonderful again.
Not quite.
Apple was indeed in trouble, though hardly facing extinction, when Jobs took over. They had a very serious drop in number of computers sold, but the patient, though in serious condition, had stablilized, selling about 600-650,000 computers a quarter.
Jobs pushed and promoted the iMac, which was a major improvement over the previous low-end Apple computers. IMac sales almost single-handedly boosted Apple’s sales figures from 600-650,000 to roughly 900,000 a quarter.
That got people’s attention, and Wall Street began to look more kindly upon the stock.
However, to Wall Street, growth is like Lays potato chips, you can’t stop at just one. And that’s just what happened with Apple.
Santa Lied
Apple has very erratic sales patterns compared to most other computer manufacturers. Their big business sales (businesses tend to buy throughout the year) are negligible. They usually get bought by individuals and small businesses.
Apple doesn’t upgrade their products as often as the PC OEMs; but when they do, there’s usually a bigger improvement. PC OEMs take baby steps all the time; Apple jumps every once in a while. So what happens is that people tend not to buy the few months before new products are due to arrive (usually in the fall), then buy a lot
of them the first few months after introduction.
Combine the two, and you get some pretty lopsided results. Christmas season is usually pretty good for all PC companies; but when you add new models to Christmas, Apple sales jump up more for Christmas, then drop a lot more afterwards.
On the other hand, the summer months are usually pretty bad for Apple. A year ago, sales decreased about 15% from the previous quarter (from about 900K to 775K), much worse results than this time around. Yet the stock had only a modest decline, and soon headed upwards again.
Christmas 1999 was a very good time for Apple. They sold almost 1.4 million computers that quarter. Pretty big jump from 775K. How did they do it?
Over half the sales were iMacs, and almost 20% were iBooks (Apple’s cheaper notebook computer).
As you might guess, Mac fans were ecstatic about this, and some were ready to take on the Evil Empire. In a different place, I cautioned that one quarter did not make a breakthrough, and that the more expensive Mac computers didn’t do so well. I suggested that the next quarter would tell whether Apple was really surging, or not.
Well, next quarter came, and Apple sales dropped 25%. iMac sales dropped by a third. iBook sales dropped by half. Apple’s sales were still above a million, but if you took out iBook sales, they were no better than they had been in 1999. No breakthrough for Macs here. Actually, not even average growth.
This was when we should have had the stock drop. What did it actually do? It went up.
Pretty much the same for the second quarter.
The third quarter figures released by Apple actually didn’t look too bad, roughly about the same revenue as the quarter. Not great by any means, but better than the 15% drop they had the year before.
Revenues were about the same, but profits were down by a third. How come?
We don’t know for sure; but by looking at previous quarters, we can venture some pretty good guesses.
Apple’s operating expenses have been up about 50 million dollars the last couple quarters. About a third of the increase is R&D; the rest other expenses. Apple spends a lot more money on its dealer network than a Dell, and it’s money you spend whether the customers show up or not. So this isn’t too big a deal.
When you make money, you pay taxes. Apple’s used up the tax benefits it stored up in the bad days when it was losing money, and paying about $50 million dollars a quarter more than they did a year ago. Certainly something Apple warned about a long time back.
It’s also likely Apple wasn’t able to top up profits a bit with the sale of stock in companies like they have the last few quarters.
Put all of them together, and you get the low-end of the roller coaster. The problem with Apple is not that they had this quarter. The problem with Apple is that they just aren’t growing very much long-term, and that was evident six months ago.
CPU/Stockbroker
Let’s look at Intel’s total income over the past couple years.
1997: $10,659
1998: $9,137
1999: $11,228
2000: $7,943 (six months)
Hmmm. Look like Intel had a bad 1998, but recovered in 1999 and is really doing well this year.
Not so fast. Now let’s look at Intel’s operating income for those years. “Operating income” means profits from the actual business:
1997: $9,887
1998: $8,379
1999: $9,767
2000: $4,962 (six months)
Huh? Intel’s not doing any better in 2000 than it was in 1997! What happened?
This is what happened. Here’s Intel’s “interest income and other” (other means sales of stock in other companies.
1997: $799
1998: $792
1999: $1,497
2000: $3,002 (six months)
What Intel has been doing is selling off its stock portfolio, and the profits from that have been propping up their profits. Intel is making no more money from actual business
than it did three years ago.
Now reporting rules make you separate the regular business income from other income, and there’s a good reason for that. You’re in business to make steady money from the business, not to make killings in the stock market. If you do that too, fine, but you can’t expect
to make steady profits doing that like you can from your regular business.
Now I didn’t need the CIA to come up with this, and I’m not expecting Intel Special Forces this or any other afternoon. All readily available public information, and it certainly shouldn’t be rocket science for people actually paid to do this. Often, the media will even report the profits of a company that way. But most of them didn’t point that out for Intel the last couple years.
This quarter, when Intel comes out with its numbers, I bet profits will be down, and that will be because they couldn’t sell enough stock and enough profit.
Again, like Apple, the problem with Intel isn’t the quarter; it’s that they’re not growing much in the long-term.
Are you beginning to see a little problem here?
Will talk about this more tomorrow, and see how it affects companies like AMD.
The Stock Market Isn’t The SAT; It’s Family Feud
We’ve talked about two companies where people thought the company was doing better than it actually was. Let’s talk about a company where the opposite is the case: AMD.
A year ago, some were questioning the continued existence of AMD. Now it looks like a fairly solid moneymaker. AMD has not made a serious mistake following a very risky strategy over the last eighteen months or so. One more transition, and they
should be sitting pretty for close to a year, with prospects beyond that looking better than they did a year ago.
So what has the market done? Dropped the share price almost 50% in the last couple months.
By any objective measurement, AMD stock should be a good deal higher than it is now. But objective measurements don’t determine the stock price, people do. If people don’t think so, it doesn’t matter if it is so.
It’s Family Feud With The Addams Family
A combination of a bull market, practically free Internet trading, and intense TV coverage has created a new generation of stockholders. And they are crazy.
The second someone asks you for a hot stock tip, you know that person’s a speculator and not an investor. Where else do the hear the term “hot tip?” The racetrack. People don’t invest at the racetrack; they gamble.
I call investment putting money into a stock after careful consideration with the expectation of making a reasonable return on your money over a lengthy period of time.
I call speculation/gambling the expectation of getting rich quick, with no particularly good basis for believing that. If you can completely explain why you invested in a stock in three sentences or less; you have no good idea why you’re in that stock.
If you have no idea why you’re in the stock, you have no idea what the stock is really worth, either now or later. You may believe it should be a lot higher than it is today, but lots of people think they’re going to win the lottery, too. You have no idea what is important news, and what isn’t. You have no perspective, no basis for judgment.
If you have no reason for being in the stock in the first place, you have no reason to stay in it if things look bad at the moment. So you play reverse musical chairs at the first sign of bad news, and find something new to pin your hopes on, leaving those not playing that game holding the bag.
When Lemmings Surround You, You’re Going Down, Too
While the lunatics run the asylum, they set the rules, no matter how far-fetched or absurd. When you look at the tech sector, the lunatics have run the place the last two years, and are only slowly getting pushed back into their padded cells.
But while they’re in charge, they run the show. If they all decide that they’re going to ride Stock A like a rocket, that stock is going to go up and keep going up, no matter what. If they abandon ship, it’s going down, no matter what.
And once they’ve been burned, they don’t go back very often, even when they should. Like continuing to bet on a horse you got as a hot tip after it lost.
In An Asylum, Being Sane Is Crazy
You have a large number of essentially irrational people moving the price of stocks around. What do you do if you’re professional stock portfolio managers? Why, you join in.
I have heard senior analysts on television flat-out say pretty close to “There’s no good reason for this stock to go up, but we’re going to buy it anyway, because the herd is stampeding that way.”
Herd mentality is prevalent among stock analysts. Virtually no one has a bad word to say when the herd is stampeding one way, in fact, a lot of analysts lead the charge. When the herd turns, so do they, and never mind what they said two days ago.
I’ve read and listened to a lot of analysts talking about CPU stocks, and I’ve been stunned by their apparent general ignorance/stupidity.
With very few exceptions, they don’t seem to have the level of comprehension of the market you’d expect in the area where they’re supposed to be experts. You hear them explain their rationales, and most of the time, it seems like they pick the facts they like and ignore the ones they don’t.
Kick You When He’s Up, Kick You When He’s Down
This has been AMD’s life the past few months. If Intel announces something that sounds good, AMD goes down. If Intel announces something that sounds bad, AMD goes down, too.
This deck seems stacked.
Intel’s been announcing vaporware left and right. Six months later, it’s still not around. You’d think people would get wise to this after a couple of these. Not yet.
The Neighbor Across the Street Got Arrested, So You’re a Criminal, Too
Intel doesn’t do too well, and all of a sudden, the whole tech sector has turned sour. No conception as to the possibility that somebody could do good while somebody else does bad.
At least Intel is a giant in the area. You can see why people can make that mistake.
But Apple? It’s out on the fringes. It sells a little more than 3% of the computers being made. It can’t get updated processors. It had less of a seasonal slump than it did last year. All this is hardly a bellweather of the entire industry, but nonetheless, down goes everybody else.
When A 15% Increase Becomes A Decline
I’ve been hearing quite a bit that the tech sector is going into a slump. It isn’t. It may not be growing quite as fast as it was a year ago, but it’s still doing pretty well by historical standards.
Now if the stock price of a company has been jacked up to the point where it has to grow 50% a year to justify the price; it makes sense to see the stock price plummet if that’s not going to happen.
But while Apple and Intel may have been a bit to somewhat overpriced, neither had outrageously high stock prices, and, especially in the case of Apple, a seasonal slump was to be expected. Didn’t matter.
AMD will probably report earnings at or a bit above projections. Like Apple, they’re going to be paying more in income taxes, too. Quite possible that the pre-tax earnings will be up, but the after-tax earnings per share will be down from the previous quarter.
So what will the stock do? Who the hell knows? In a rational market, that news would either boost or at least not hurt the share price. In the current environment, the herd may say, “See? They didn’t beat the numbers by as much as they did last quarter. The tech sky IS falling!” Never mind that the stock is undervalued for no good reason as is. Down it goes.
Outguessing Lunatics
A prudent, rational investor can do everything right, and still lose. You can’t make rational decisions in an irrational market. If a piece of bad news does nothing to a stock price in Year One, and a piece of less bad news drops the stock price 50% in Year Two, what do you have to go by?
A lot of you are saying, “But Ed, so what if there are a lot of fools out there?” We’ll just take advantage of that, and eventually, sanity and reason will return.”
Don’t be so sure about that.
What’s been happening during 2000 is that sanity is slowly returning to the tech sector. First, the BS.com fluff got annihilated. Then the solid, but overpriced companies started getting put in their place.
However, just as the tech stock action was too extreme, the reaction is likely to be just as extreme the other way. This is usually what eventually happens when there’s been specualative excess in an area. It’s pretty likely we’re going from “no tech stock can be bad” to “no tech stock can be good.” Not only does that slice the price of the previous high-flyers, it clips the wings of those who never got a chance to take off.
This is the big danger facing AMD. It jumped up quite a bit once it developed some prospects like all the other stocks, but even at its peak, it still was a bargain compared to other tech stocks, and reasonably priced by historical standards.
The prospects for AMD over the next year look a lot better than they did six months ago. They won’t have Willamette to seriously contend with until the middle of next year. Itanium is screwing up. Nonetheless, the stock price has acted like the opposite has happened.
In a rational marketplace, it should rebound. But the tech sector is not a rational marketplace. If the tech sector becomes an area to be shunned because too many people got burned by the excesses, it will likely stay that way for a long time. We’ll go from irrational optimism to irrational pessimism. While AMD’s prospects look good now for a while, it’s anybody’s guess what they’ll be like three or five or ten years from now? Markets that go through a speculative party often stay beat up for a decade or more.
Conclusion
It’s crazy out there, and it’s crazy to assume it isn’t. The party may be great, but the hangover isn’t, and in this hangover, even the designated drivers get hurt.
Be careful out there.
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