Tim Cook gets paid more if Apple stock outperforms the S&P 500 index in 2014. His compensation is structured in a way that pays him more when his efforts reward shareholders. What’s not for investors to love about a CEO like that?
Given his compensation structure, Tim Cook probably feels pretty good about the way 2014 is shaping up. His company’s stock is undervalued right now, demand for its wares is strong and its biggest competitors are running scared.
Apple’s stock ended the year with a price-to-earnings ratio of around 14. That’s about 20% below the historical average for an S&P 500 stock. Investors are paying well above the historical average for the majority of S&P 500 stocks. If Apple were valued by investors in the same way they value most large company stocks, the company would have traded about $100 higher to close out 2013. The only rationale for the stock price to be so low would be that investors see bleaker times ahead for the company. But year-end data would suggest that any such sentiment is likely unjustified.
A quick check on the availability of Apple’s iPad Mini shows that the company can’t keep up with the demand for this product in any zip code whether its Los Angeles, New York City, Seattle, St. Louis or Atlanta. This product has more customers waiting for it than there will be in the lines at Chik-Fil-A on Phil Robertson appreciation day. Phones and tablets are a lot less expensive to build, ship and support than larger, bulkier desktop or even laptop computers.
The second reason to expect Apple to outperform other companies is that this company has shown it can single-handedly accomplish what a collection of other companies cannot, and still leave customers asking for more. Tablet computing is not a reversible trend and Apple shows that it can continue to tap pent-up customer demand better than any other supplier out there.
A third reason to expect that Apple has it right is that its competition has it all wrong. The single biggest indicator of that is Steve Ballmer’s abrupt announcement last summer that he would be stepping down in the coming year as CEO of Microsoft. The continuing struggles that company is manifesting on two fronts: selling surface tablets and finding a new CEO. Perhaps many don’t realize what kind of a message Microsoft has sent by creating the continuing ill-will and service headaches associated with the release of Windows 8. This operating system had the lowest adoption rate of any such offering in the company’s history and the greatest number of consumer complaints.
The primary issue was that the interface was optimized for the tablet even though most of its users are not using touch-sensitive devices. But Microsoft has no plans to reverse this discomfort—even if the reintroduction of the start button in the Windows 8.1 update appeared to alleviate end-user pain a bit. The fact is the company wouldn’t dare back away from delivering single-platform programmability to its developer community now–not when Surface tablet sales appear to be picking up a bit. They know the realities of personal computing even if a few activist investors do not: Apple had it right to begin with.
Perhaps that is why the weekly price chart for AAPL currently shows a new upward trend based on the 50-week moving average (see chart below). If this trend continues, a twenty percent increase in the stock price over the next year would not be a stretch of the imagination.