Michael Burry, of Scion Asset Management, has been revealed to have accumulated a significant short position in Apple (AAPL). This is the same investor who predicted the housing market crash of the 2000s, shorting mortgage-backed securities and who cashed in on Gamestop’s surge, before the Reddit-led charge. Now he has 206,000 put options against Apple, valued at $36m.
Put options are an instrument to anticipate declining market stock price, profiting on the decline of the stock below an exercise. The huge stake means Burry is anticipating Apple will decline roughly within the next 6 months, although details of the put options are unconfirmed.
The Future of Apple
The question remains: is Apple past its peak? It’s a question with no answer, and it seems this is supported by some of the biggest investors. As we have seen Burry is betting on Apple falling, but Buffet has amassed a fortune, as his group Berkshire Hathaway has roughly 911m AAPL shares. These are clearly two polar trading styles, one a notorious short-seller, the other a long-term holder. And who is right?
Is Apple Overvalued?
There are reasons to believe AAPL is overvalued and will fall. Revenue growth projections are falling:
Economic climates are not in favour of Apple, with supply link delays and surging inflation hurting all big-tech. Apple is severely hit with China’s Zero-Covid Policy, which have meant one of its biggest suppliers Foxconn has suspended activity in 2 of its factories, and the NASDAQ performing below trend. All these are symptoms of falling share prices and falling valuations, but does not point to failure; just temporary trouble, and is the basis for Buffet’s vision, as Apple remains an intrinsically valuable company.
To see if Apple is overvalued, undervalued or in-line with expectations, we can compare how it fares in comparisons based on cash-flow price multiples.
Apple does seem slightly overvalued, higher than the Nasdaq forward P/E ratio, which was 18.77 at close on 20thMay, and on par or higher than some of its competitors, in a comparable analysis, the only exception being the higher forward P/E ratio commanded by Amazon (47.62). A higher forward P/E ratio estimates the relative value of earnings, and a higher ratio generally suggests the stock is expensive, pointing to overvaluation, driven by higher growth expectations, which will increase future earnings. However, it appears the forward P/E ratio by Apple is off-line with what we have shown in relation to its revenue growth, as that would indicate slower growth. In addition, the AAPL forward P/E ratio is expected to average around 20.3x, lower than what is suggested by the market today. Both point to a higher P/E ratio, one method which could show AAPL is indeed overvalued. Notably there are limitations to the use of P/E ratios, and is just one valuation technique, however it is a widely used metric which can provide sound reasoning.
Is the Tech Industry Failing?
The tech industry continues to be prosperous, and even Burry supports this, with his recent acquisitions of Meta and Alphabet, both sizeable amounts of 80,000 and 6,500 shares respectively. It appears the entire industry is not expected to see the same decline as Apple is, according to Burry, showing resilience of the $5.2tn industry. Supply chain issues are a small hiccup in a booming field, owing its success to:
the importance of cloud systems as a driver of security and providing the basis for innovation, through data storage and internet
new supply chain links will be formed in the future
global integration easing transfer of technology across borders
role of technology in other industries such as healthcare and ESG
dependence on tech inflating due to global pandemics
‘forced’ reliance with the decline in use of physical currency
The overheating of the US economy is an immediate concern, but will likely be alleviating following interest rate hikes, which will hurt the global economy, and possibly lead to recessionary trends, however the long-term prospects of the industry remain strong.
Who is right then?
It seems both Burry and Buffet can be correct in their predictions. While conditions point to the immediate price of AAPL falling, which is exactly what Burry is betting on with options, this does not mean a long position in AAPL is not profitable; the two are not mutually exclusive. Buffet is counting on future value of the company, which is likely to be lucrative. These are two different trading styles and approaches, betting on different time horizons, which mean they are not necessarily conflicting choices. The options give Burry limited downside, however long positions provide unlimited upside. Neither is ‘better’ than the other, simply two sides of the same coin.