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Making Sense of Apple Stock's Roller Coaster Ride

By Aswath Damodaran, Kerschner Family Chair in Finance Education

damodaran opinion article 1

When a stock becomes a pricing play, investors no longer pay attention to underlying value and instead focus on trivial stories.

If you have been an Apple stockholder last year, you probably feel like you have been on a roller coaster.

Apple began 2012 by attaining the largest market cap in the world, with some analysts predicting that it would cross a trillion in market value. The stock price hit $700 in September, around the introduction of the iPhone 5. But in the weeks after, disillusionment set in and the stock price dropped to about $500 by the end of the year. Recent earnings disappointment has plunged the stock some 12%, and panic seems to have set in.

How can a company fall from grace so quickly, especially when it still possesses enviable profit margins and perhaps the most valuable franchise in the world?

The answer lies in recognizing that a market price is set by demand and supply, which, in turn, are driven not only by underlying value but also by other factors including hope, hype and momentum. Apple is particularly susceptible to these "nonvalue" forces.

Apple has acquired a motley collection of investors, with wildly divergent views about the company and its future. There are growth investors, who were attracted by its capacity to come up with new products and conquer new markets. There are momentum investors, who were drawn by the ever-rising stock price (at least a year ago). And there are value investors, who were enticed by its capacity to generate and pay out large cash flows.

Read full article as published on CNN.com.