With the Dow hitting new highs, will Apple stock follow? Every investor wants their favorite stock to increase in value. If you own shares of Apple (ticker: AAPL), you're most likely no different than any other shareholder in Apple. You're in love with the company's products and shares. And it makes sense. If you had invested $1,000 in Apple stock when it was trading at $100 per share, today your initial $1,000 investment is worth over $4,000. Similarly, a $10,000 investment in Apple stock is now worth over $40,000. A $100,000 investment in Apple stock at $100 per share is now worth over $400, 000.
Is Apple Stock Unique?
Under the direction of Steve Jobs, Apple focused on innovation and ease of use for all of its products. Turns out, consumers fell in love with the iPhone and iPad experience. It was Apple's shift from being a computer company to a consumer electronics company that created explosive profits. In order to drive a stock's price higher, Wall Street needs to see explosive profits. What many self-directed investors fail to realized is Wall Street only cares about one thing. That one thing is income, also known as revenue.
Apple, the company, has experienced explosive revenue growth over the past five years. Annual gross sales ranged from just over $65 billion in 2010 to over $156 billion in 2012. That kind of revenue growth tends to attract institutional investors like banks, college endowments, hedge funds, and insurance companies. These institutional investors, who I refer to as "big money," are always looking for stocks to trade and/or invest in. Here's how "big money" earns big money.
How Wall Street Works
If an insurance company purchased one million shares of Apple stock at $200 per share, they now have an investment of $200 million in play. If they sell those shares when Apple's stock price increases one dollar, then they will have a profit of one million dollars off of a one dollar increase in share price. If that pattern can be duplicated four times, that equals a four million dollar profit in one month.
An institution with an eye toward investing in the longer term is looking for Apple's stock price to increase ten, twenty or even fifty percent. A fifty percent increase in stock price would turn a $200 million investment into a $300 million paper profit. When there's explosive revenue growth, stock prices increase.
Now let's take a look at what would happen when almost every consumer has an iPod, iPhone and an iPad. Revenue growth would slow. Slow revenue would make Apple's stock less desirable to own or trade. Slower revenue would cause Apple's stock price to level off or start to decline.
So here's the deal. With the unfortunate death of Steve Jobs that is exactly what seems to be happening. The focus on innovation appears to be slowing. That could mean slower revenue growth in 2013. In fact, its slower revue growth has contributed to the stock's recent price decline from $700 to $466 per share. As an investor, your job is to find the next Apple.
Where's the growth in today's stock market? What company holds the potential of being the next Apple you ask? That will be the focus of my next few blog entries.