Einhorn Takes on the Apple Haters: No Law Against a $1 Trillion Market Cap
David Einhorn, hedge fund manager at Greenlight Capital and increasingly famous for his vocal take-downs of companies he has shorted – see Green Mountain Coffee Roasters (GMCR) – isn’t purely a negative guy.
Einhorn, for instance, has only bouquets for Apple (AAPL), and in his latest letter to Greenlight investors makes a case for a $1 trillion market cap for Apple stock, which Greenlight has a sizable position in. Fair enough.
Like many an argument, Einhorn’s seems as much aimed at convincing you of his point of view as it does in actually making a factual case for Apple shares. Rather than simply argue Apple’s merits, Einhorn structures his argument as a four-part rebuttal. You be the judge whether he overstates or misstates the opposition’s point of view, and also whether he’s dodging meatier issues on Apple.
--“Too many hedge funds own AAPL.” Einhorn quickly dispenses with this one, noting that hedgies on average have less than 2% of assets in Apple shares, while Apple has a 4% weighting in the S&P 500. Funds are underweighted, he says, and the implication is they oughta buy some more.
--“If AAPL’s share price doubles, it will have a $1 trillion market capitalization, and everyone knows there can be no such thing as a $1 trillion company.” Maybe some knucklehead on Stocktwits is making this argument, but in truth more people are rooting for Apple stock than against it. Einhorn, as Michael Jordan used to do to motivate himself, is trying to make Apple an underdog. Seems disingenuous.
--“Motorola (GOOG), Research in Motion (RIMM) and Nokia (NOK) were all market leaders that proved unable to hold onto their dominant positions and healthy margins; this to will be AAPL’s fate.” (Symbols added by YCharts.) Haters incorrectly view Apple as a hardware company, Einhorn says, when it’s “a software company that monetizes its value through repeated sales of high-margin hardware.” No argument there, but isn’t the bigger issue potential gadget fatigue?
Apple has the mobile space with iPhones, it has you in the airplane seat with iPad, and if rumors are correct it may get you in living room with a really cool television set. What next? An iVibrator? An iCar? Einhorn doesn’t specifically address the issue of whether people’s gadget lust will become sated, which could limit growth and even make replacing today’s revenue levels difficult.
--“AAPL can’t possibly maintain its current high-growth trajectory.” Einhorn happily concedes the point: “AAPL shares are not priced for growth. Its current valuation is justified without it.” Perhaps true. But it would seem for future years’ revenue to even match today’s level, Apple needs new products, significant improvements in existing products, and new consumers. Not everyone wants to replace their iPhone every year, eh?
Einhorn's right on that, based on its current performance, Apple seems darned cheap.
Filed under: Investing Ideas