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January 18, 2011

Good Thoughts on Jobs and Apple

Walter Piecyk, an analyst I know at BTIG, wrote the following brief comment on Apple and published it this morning. The volume of Wall Street commentary on Apple this morning is enormous as expected. Walter's note best captures my thinking so I reproduce it here with the hope that Walter and BTIG don't mind.

"The knee-jerk reaction for a stock like Apple would be to buy on dips and that would certainly be following the advice of most analysts this morning. The chorus of buy on weakness calls could certainly temper the sell off today in front of a quarter when, as usual, the consensus is well above guidance. That sets up for a pretty risky 24 hours given how the stock has reacted in the past from slight deviations in items like gross margins and units not to mention the risk of any commentary on the call that provides more details about Jobs’ health or the coming quarter. We continue to believe that Apple is the best way to play the explosion of smart phone and tablet growth, but we don’t think investors need to be more aggressive than normal when the sell side is pounding the table the day of an EPS report.

Valuation multiples are driven by growth and risk and when you introduce increased risk, the multiple of a stock should contract. Steve Jobs’ medical leave increases the risk at Apple both in terms of near term execution as well as the long term growth potential of the company so investors should not be surprised by the sell-off in Apple’s stock this morning. Investors will soon have a new data point to consider when evaluating growth and risk this afternoon when the company reports its first fiscal quarter of the new year.

We are believers that one person, particularly the CEO, can make a material difference in an organization, whether that difference is for the good or the bad. In any organization the tone is set at the top. We have seen companies like Motorola and Sprint spend years and in some cases multiple CEO’s trying to undo a losing culture. We believe Jobs has installed a winning culture and a focus on quality that will have a lasting impact at Apple whether he returns or not. More specifically, product roadmaps are not developed overnight. Jobs product decisions and direction will be felt for at least six quarters before investors have to worry about the decisions made by any replacements but a stock like Apple might look out at growth estimates beyond six quarters."

Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, inlcuding in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Posted by Steve Birenberg at January 18, 2011 09:11 AM in AAPL