When I left the country–and much of the Internet–to go on vacation three weeks ago, the tech world still seemed halfway sane. Instagram was just a super-cool dozen-or-so-person start-up, not a billion-dollar behemoth. Google’s augmented reality glasses were only a zany rumor, not a confessed roadmap. And beneath it all, Apple was still the surest bet in tech: On the strength of monster sales of the iPhone, the new iPad, and the news that it would begin offering a tiny dividend, AAPL had surged by more than 50 percent since the start of the year, and its future appeared limitless.
It still does. I admit I was under a rock for the past few weeks, but scanning through the headlines, I can’t find a single negative piece of news regarding Apple’s business fundamentals. (There was the Justice Department ebook complaint, but that doesn’t count; ebooks matter as much to Apple’s future revenues as Google Glass matters to the search company.)
And yet, in the absence of any new information about Apple, investors went nuts. Over the past month, they first ran up Apple by six percent, pushing it to a high of $644 on April 9. Then, just as swiftly, Apple plummeted. Yesterday the stock closed at $572.98, marking a decline of nearly 10 percent since the peak. Looking at the chart, you’d assume the company disclosed something terrible in the middle of April, some bit of news that suggested its future would be dire. But it didn’t. What happened, instead, was that investors got spooked by Apple’s success. The company’s stock is now laboring under the ridiculous smear known as the “law of large numbers”–a theory that, as Network World’s Yoni Heisler points out, holds water in statistics but makes little sense when applied to the stock market. The basic idea is that Apple is too big to keep winning; you can only be so good for so long in the tech business, and once you’ve had a string of wins, you’re going to lose.
Perhaps that makes sense in baseball or poker. It doesn’t make sense in tech. Apple’s recent wins weren’t merely lucky. They were the result of a determined, unmatched strategy to create bestselling, profitable products in the most remunerative new market in tech, the business of mobile computing. I’m ethically barred from owning AAPL, but if I were shopping around for tech stocks, I’d pay attention to two stellar facts about the company. First, nothing about Apple’s recent performance suggests any change in that basic strategy–Apple’s products continue to sell extremely well, and, more importantly, they continue to be unnervingly profitable. Second, and more importantly, the markets that Apple is in–smartphones and tablets–are the closest thing in business to being unbounded. Over the next few years hundreds of millions of people around the world will switch from dumbphones to smartphones, and probably as many more will pick up tablets to replace their PCs. A large number of those people–perhaps not a majority, but a substantial minority–will choose Apple. And because Apple makes so much money on each of its devices, its numbers will continue to stun.
I’ve made this argument before. The problem is that these are long-term trends. Apple’s performance now looks fantastic, but it will take a couple more years–as more and more people in new markets join the mobile revolution–for us to recognize the company’s performance as being truly historic. Apple’s recent stock chart, though, suggests that many investors don’t seem interested in the long term. They’re vulnerable to anxiety, to panic, to cashing in on a recent good thing. You can see some logic to this. If you bought a bushel of AAPLs at $411 on the first trading day of the year, selling at $600 now yields a nice 45 percent return over just four months. Why stomach any more risk if you can keep such a sweet sum?
Because there’s more–a lot more–ahead. When you look back on this time a few years from now, cashing out of Apple now will begin to look like jumping from the train just after it chugs out of the station. The key is to look at long-term trends; don’t focus too much on what’s happening in any given quarter, but rather on the large tech positions that Apple is poised to realize.
You’ll have an opportunity to exercise such self-control this Tuesday, when Apple releases its second quarter financial results. Most analysts will pay attention to the number of iPhones the company sold. If that number comes in above Wall Street estimates of around 30 million, the stock will surge. If it comes in below, even slightly below, the stock will slide, possibly by a bundle.
The smart investor will ignore any slight tick above or below “expectations.” Remember: As it pertains to Apple’s future, it’s going to make little difference if the company sold 28 million iPhones this quarter or 33 million. What really matters is that Apple is continuing to expand its sales (28 million iPhones would represent a larger than 50 percent increase over last year) and that its margins stay relatively healthy.
As long as that happens, ignore any fluctuations in the price. Worriers gonna worry, but the substance will remain the same: No company is better positioned than Apple to win a landslide in the coming mobile boom. If you want to get a slice of that jackpot, just keep repeating these words: Long term, long term, long term.