Another Bite at the Apple
Featuring Max Wolff
Published on: August 16th, 2019 • Duration: 14 minutesMax Wolff, managing partner at Multivariate, breaks down his bearish thesis on Apple and explains why the stock is still rising despite what appears to be a gloomy outlook. He cites trade wars and competition as major reasons for concerns, notes the importance of iPhone sales to the overall business, and considers how traders should position themselves in the current market environment, in this interview with Alex Rosenberg. Filmed on August 14, 2019.
ALEX ROSENBERG: Welcome to Trade Ideas. I'm Alex Rosenberg, here with Max Wolff, a multivariate. Max, thanks for joining us once again.
MAX WOLFF: Always my pleasure. Thanks for having me.
ALEX ROSENBERG: Sure. So we're going to talk about Apple today. And this morning, as we're taping this, it's down about 2%, up once yesterday. Very responsive to the news flow, both the tariff side, and also the potential recession, no recession battle that's being waged as well. What do you make of this stock right here?
MAX WOLFF: Yes, so the stock has been a good image of a lot of the market here. So it's actually become pretty volatile. If you look at the 52-week range, the low end's about a buck $0.50, and high end is about 240 bucks. And for nearly trillion dollar market cap behemoths like this, that's a lot of movement in a year, right?
That's where it tells the story, but it's a whole lot of movement that simmers off to a nice uptrend, a little bit like the market as well. But it's really nicely outperformed the NASDAQ, unlike what I had expected. I thought the NASDAQ would outperform Apple. But what seems to have happened is people still like tech companies because they're a kind of growth and they're a great American story, and they particularly seem to like the ones with lots of cash on book because it looks safe.
So it did well. Not as well as Amazon, perhaps, in some months. And maybe, surprisingly, not as well as Facebook, which has done even better, but it's up about a third from the start of the year. And I cautioned on it, and the folks who didn't listen to me certainly are wealthier today than the folks who did.
ALEX ROSENBERG: So let's show people a clip, just so we can remember what you were talking about in January.
- Buying tech up is about buying the future, right? It's about hope for tomorrow, and it's not a hope for tomorrow world. It's a world between people who think it was good enough a year ago and people who want to celebrate, return to the 18th century. That's not a market. That makes people hopeful and makes people love tech.
And Apple has sort of clung to its premium pricing, and it's become a little bit less clear if they're delivering premium product, and I think that's causing some headwinds. And I the immediate cause of the trouble they're right about, which is, clearly, this trade war, or trade war issues, are not minor. Particularly in the electronics world, they're still overly dependent on their smartphones. I think Apple is rough sideways sledding, with a slight downward bias for 12 months here.
- And how far downward? Give me a percentage.
- You can easily get into the 120 handles here. I don't think you can go a lot lower than that. I started to talk about single digit PE with tons of cash there, and Apple would even go that well with the overall market. My guess is Apple, from today forward, will be about market perform. I don't think it's market outperform, and I don't have super high hopes for the market.
ALEX ROSENBERG: So basically, you were looking at the potential trade war, which has heated up, and indeed, sort of as you predicted, you're looking at potential competition and also the idea that they sell this luxury product, sort of nowhere to go but down. Not to put you on the spot, but if something went wrong in that thesis, what would you say it was?
MAX WOLFF: Yes, so it definitely went wrong, the thesis. The thesis was wrong, so that's a pretty big hair in the ointment, as they say. I don't think the analysis was incorrect. I think it all kind of worked itself out. But the multiple expanded, and they did less bad, and that was enough to get the market excited. I mean, I think the truth is that their iPhone releases are exciting to a very small number of institutionalized people now. So I was worried that it would lose its half. It did. We'll see how the new phone does.
I was worried they'd stay in iPhone story. They did. Still about half the total revenue and about 60% plus of the profit, right? I was a little bit worried they'd get caught up in the trade war. And until quite recently, when the President sort of lost the game of chicken, he said up on the tariffs, it looked like they would. I had failed to anticipate that the PlayStation 3 and the iPhone 10 would be national security sensitive, the way the President determined for the Christmas holiday. I
Mean, obviously, I have a neophyte's understanding of national security, so I missed that. That was a big flop on my part. But generally, markets are much more up, so I generally thought market sentiment would be problematic, and it's most certainly not. So we're in melt up mode, and Apple is a reasonable place to put your money in meltdown mode, for sure.
And I think folks are a bit nervous, or have been a bit nervous a few times, about trade, but they've rallied more than they've sold off. And the Apple name, I don't know if people understand this, but part of my concern was they do about 60% of their revenue offshore. They are not changing that, but that's not engendering the concern that I had feared it would.
ALEX ROSENBERG: And in terms of its relationship with the broader market, it's interesting because at one hand, it's obviously a blue chip, has a lot of cash, which know might steady them, if the market really sells off here. It's one of these companies that's not "going away," quote/unquote.
Of course, they said that about GM as well. But if the market falls 30%, maybe Apple would fare a little better, and if the market runs up, at the same time-- I mean, do you think it's kind of a growth? It's hard to call it a growth play or a safety play. How do you make sense of it relationship with the market overall?
MAX WOLFF: It's a good point. So if you look at any of the big tech darlings who have done so well, so whether it's Microsoft, or Facebook, or Apple, or Amazon, or Google, they're all a little bit sticky downward. They're loose upward, sticky downward. Makes a certain sense. They are America's global champions. I don't we don't have them and they're not by industrial policy, but they kind of are America's global champions, dominating everywhere where they're, more or less, allowed to operate, or where they're operating.
So they seem to be attracting capital, in part because they also mostly have a lot of cash on book. They're pretty stable. And for the point you made, I don't think anyone thinks that there is a risk of going away in any of these names. That being said, they're all-- Apple a little bit less-- but they're all facing heavy regulatory scrutiny. They're facing heavy political scrutiny. They've become a campaign issue, at least for some of the 400 Democrats seeking the highest office in the land.
And I don't think that goes away. I think privacy issues aren't so good for them. I think Facebook has a sort of scandal every week and Wall Street doesn't care. But eventually, they could. But they've traded super strong. Again, Twitter and Facebook traded much stronger than Apple, despite having a worse newsprint.
It's a pretty tough market. It's a melt up market, right? Everyone's going to get their 25% from a bad decision before the party's over, and Apple's not a bad decision. It's hard to say that a $950 billion market cap and a pretty sticky 35% to 38% margin isn't appealing.
ALEX ROSENBERG: So having some of the changes, though, we've seen in Apple, since you came on in January, there's been their acquisition of the Intel modem business, and then there's the streaming product, which there are some great hopes around. And Apple, it's been long prophecy that they'd get into the content side of the business. Now they're doing that a bit more. Does that change the way you look at Apple at all?
MAX WOLFF: Yeah. So Apple does have some good, positive upside here. I think the credit card and the partnership with Goldman has done, or at least initial indications, has done a lot better than we thought. They seem to be casting a broad net. It seems to be popular. The early sign ups seem to be stronger than what were guessed, so that's sort of interesting. That's, again, pretty small. It wouldn't be accretive for a while, but it's a first foray into financial services, completing the walled garden. I think there's a lot of excitement, looking at the streaming product.
Not so clear what they're going to do there, but they have portioned a billion dollars for content, and they are probably a strong candidate to be in the space. They've sold more of those Apple TVs than a lot of people probably think. There's millions of those out there. And if they give you a compelling way to get exclusive product, it could be exciting among the kind of cord cutters. That would be good for Apple because Apple hasn't been doing or showing its gravitas so well with younger people of late. And the kind of cord cutter, over the top community would be good for them to get into.
And it makes sense for them to be more in the entertainment business because the entertainment business is one of those businesses where everybody uses an Apple at work, so it makes sense. It could be quite accretive. Again, I wouldn't expect it to show up in a major way. You're talking still about a company that does $260, $270 billion a year in sales. But it could be a nice, long-term tailwind. And if you want it to be bullish on the service group, that would be one of the places I would spend time looking.
ALEX ROSENBERG: So to put you on the spot here, if you were going to initiate a trade on Apple today, would you go long or short? How would you play it?
MAX WOLFF: I've watched a little bit here, but I still think everything I was worried about with Apple is actually coming true, more or less, the way we thought it would, other than, of course, the all-important share price. It looks it's gonna flow to the market, right? So if you think the market's going to keep going up, there's no reason not to be in Apple.
It's a better place to be than most of the places to be that you'd probably rotate to, but I didn't think all the problems are there. I think 60% of the company's revenue comes from offshore. I think that half the company's revenue comes from the iPhone. And the iPhone is a very expensive premium product that people buy because they already have one.
ALEX ROSENBERG: Moving onto the market, then, says that probably will dictate Apple's share price. In your opinion, what matters here for this market? I mean, it's hard to make sense of-- the Fed mattered until it didn't. Trade wars are mattering now until they won't again. Not even where will we end the year, but what will determine where we end the year?
MAX WOLFF: Yeah, so I think we're caught in this sort of protracted moment, where it is true that corporate taxes are low. It is true that the basic regulatory environment is sort of accommodative, getting more accommodating. It's true that, while we haven't paid the piper yet for it, we've lost Federal Reserve independence.
But the Federal Reserve now comforts itself by being jerked around by traders, and otherwise fears being jerked around by a lunatic, who happens to be the President, right? So it's lost its independence, which, long-term, has been the end of every era of monetary dominance, whether it's the British, or the gold standard, or us, I think. So my guess is, until people realize that all this unusual pattern is actually bad news, they're going to trade it up, because they've done that.
Then the most risk you put on is the most return you get, for so long now that we've kind of forgotten the alternative as a group, I think, in the equity markets, and in the investment management business. I'll give an example, which is we're now debating whether the Federal Reserve can do two or three 25 basis point cuts, and literally repeal the business cycle 11 years into an expansion.
You'd fail Econ 100, and my guess is you'd still fail Econ 100 five years from now for that wisdom. But for right now, it's the law of the land. The better explanation for the market right now is Keynes', not mine. It's a beauty contest, right? You don't pick who you think is beautiful. You pick who you think everyone else thinks is the second most beautiful person in the room.
ALEX ROSENBERG: From an asset allocation perspective, then it becomes a very tough question of where you keep your money. I mean, if you're worried about the short-term, maybe you just stay normal, state nimble, I guess. But from a long-term perspective, I mean, how do you make sense of that?
MAX WOLFF: So we like long-term secular trends that we don't think will be much moved around by the business cycle, right? So one we've talked about was with you and your fine colleagues on a number of occasions. We like the European rearmament trade, if that makes sense. We like growing nationalism. I think one of the most successful exports of the Trump administration will be hostility to foreigners and narrow self-interest and economic policy. And that does seem to be spreading well.
That has implications, right? Maybe not for national security sensitive items, like the PlayStation 3, but for other items, it can. And also, we tend to think that the business cycle has not been repealed. So we want to stay away from lots of directional risk and we want secular trends. Do I actually think there's probably going to be upward price pressure because of the climate, and some climate change related issues, and also some free trade related issues in soft foodstuffs?
And we're starting to look into that as an area where we think there's going to be a little bit of stressing to the global supply chain, and there's probably some upside there. Soft commodities don't tend to get a lot of investor attention, but we know them as sustenance for the human race. And as narrow-minded narcissistic humans, eating every day remains a top priority of many of the world's citizens. So we think that's sort of a winner. You know, you don't wake up in the morning and say, oh, shucks. I'll just do the 400 calories today because the economy's soft. So we'd like that, too, less cyclical exposure.
ALEX ROSENBERG: So food versus PlayStation, maybe you see food as slightly more important for--
MAX WOLFF: Obviously not. So I don't make the same mistake twice, right? Hand on the stove once, hand on the stove twice, two different personalities. But obviously, no. Obviously, that's not important, but I used to think it was.
ALEX ROSENBERG: OK. Max, well, thanks so much for joining us here on Trade Ideas.