Photo: Screenshot from CNBC
David Einhorn’s hedge fund, Greenlight Capital, sent its first quarter letter to investors yesterday. In the letter, he defended the fund’s position in Apple stock against those who think the stock is currently in a bubble (via @StreetSleuth).Einhorn responded to four “common concerns” he’s heard about holding the stock at these levels. Here are the arguments against Apple that he cites:
This is his language.
1. Too many hedge funds own AAPL.
2. If AAPL’s share price doubles, it will have a $1 trillion market capitalisation, and everyone knows there can be no such thing as a $1 trillion company.
3. Motorola, Research in Motion and Nokia were all market leaders that proved unable to hold onto their dominant positions and healthy margins; this too will be AAPL’s fate.
4. AAPL can’t possibly maintain its current hyper-growth trajectory.
He takes these point by point, writing:
1. Too many funds. It’s not clear what the objection is here. We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse. Moreover, if everyone already owns AAPL, who is left to buy it? Collectively, hedge funds currently hold less than 5%2 of AAPL’s outstanding shares, and no hedge fund ranks among the top 40 holders of the stock. The average hedge fund has less than 2%2 of its equity assets in AAPL versus AAPL’s 4% weighting in the S&P 500, which means hedge funds are actually underweight AAPL.
2. A trillion dollars? We’ve scoured the Nasdaq listing rules, reviewed the Securities Exchange Act of 1934, and engaged a leading numerologist. We can’t find any prohibition on trillion dollar market capitalizations.
3. All empires must fall. This concern, while not as arbitrary as the first two, reinforces our belief that the sceptics have a fundamental misunderstanding of AAPL. Their view suggests that AAPL is a hardware company. We disagree.
4. Growing pains. AAPL shares are not priced for growth. Its current valuation is justified without it.
Einhorn is adamant about Greenlight’s continued position in Apple and believes that based on current valuation multiples, the stock is trading cheaply against the rest of the market, implying more upside from here.