By Brian Nelson, CFA
It’s difficult to be a business these days. Not only do you have to provide a service that customers are willing to pay for, but your customers have to have the means to pay for it. But more and more, we are seeing that businesses have more obstacles to overcome, and I’m not just talking about increased regulations. I’m talking about hackers, and their work is becoming more and more prevalent.
Target (TGT) continues to be distracted from its credit data breach, while eBay (EBAY) recently reported a cyber attack, though of the less-serious variety. This week, reports indicate that Home Depot (HD) has been the target of a massive credit card data breach. Though admitting that accounts were, in fact, compromised, Apple (AAPL) has stated yesterday that the widely-publicized celebrity ‘hack’ wasn’t a breach in its iCloud and ‘Find my iPhone’ systems, a distinction that we’re having trouble making. Here’s Apple’s official statement on the matter:
We wanted to provide an update to our investigation into the theft of photos of certain celebrities. When we learned of the theft, we were outraged and immediately mobilized Apple’s engineers to discover the source. Our customers’ privacy and security are of utmost importance to us. After more than 40 hours of investigation, we have discovered that certain celebrity accounts were compromised by a very targeted attack on user names, passwords and security questions, a practice that has become all too common on the Internet. None of the cases we have investigated has resulted from any breach in any of Apple’s systems including iCloud or Find my iPhone. We are continuing to work with law enforcement to help identify the criminals involved.
To protect against this type of attack, we advise all users to always use a strong password and enable two-step verification. Both of these are addressed on our website at http://support.apple.com/kb/ht4232.
We’re disappointed that Apple’s systems weren’t up to spec to ward off such behavior, but we don’t think this should reflect poorly on the company. Criminal activity is criminal activity. Though such news may be critically important for the consumer, security measures will eventually be stepped up, and we don’t think it is going to impact Apple’s ability to draw customers in with its impending launch of the next-generation iPhone. Macworld, perhaps one of the best sources for consumer information related to Apple, has stated that the iPhone 6 is “about as close to a sure thing as you can get” with only its form as the wildcard for news at the September 9 event. For investors in Apple stock, we continue to believe that a larger iPhone 6 is better.
Apple’s equity price rebound may not be over yet. On July 24, 2013, we added to the position in Apple in the Best Ideas portfolio and opened a new position in the Dividend Growth portfolio at a split-adjusted price of ~$63 per share. In April 2014, we figuratively pounded the table on Apple’s shares. Please click here; we even mapped out the future trajectory to the split-adjusted price of $100 per share in the piece. Here’s the transaction alert email. Remember the image below?
Image Source: Valuentum
The call on Baidu (BIDU) may have been equally impressive. Here’s the second half of Baidu’s email transaction alert here. We applaud followers of the Best Ideas portfolio and Dividend Growth portfolio. These ideas have been fantastic performers, and we’re applauding you with our words, not thumping our chests. We serve you, and we only do well when you do well (period). Please also understand that we strive to have a high hit rate (percentage of ideas in the portfolios that outperform). We’re not cherry-picking ideas. These have been the ones we’ve staked our reputation on, and they’ve worked out fantastically.
We’ve since closed the position in Baidu, but we still expect Apple to hold the $100 per-share mark (despite some downgrades from the sell side). We would expect upside to as high as $120 per share on the basis of a significant upgrade cycle with respect to the iPhone 6, lack of cannibalization from the iPad as new versions are rolled out, the probability of a wearable platform on deck, and its huge market opportunity in China. We’ll be monitoring Apple’s September 9 event closely.
Valuentum’s Take
One of the most challenging parts of being a financial publisher is appropriately conveying the different analytical conclusions drawn from consumer news versus business news on the same topic and extending an informed opinion about the materiality (or lack of materiality) of such news to the investment process.
In our view, the data breaches are not material, and while they may serve as a distraction to the executive suites, we inevitably believe that these four bellwethers will put such events behind them. Criminal activity is nearly impossible to anticipate in the financial modeling process, which further supports the application of a margin of safety within the valuation aspect of the Valuentum Buying Index. Apple and eBay remain portfolio constituents.
Interested in more dividend growth stocks? View our Dividend Growth portfolio or inquire about the Dividend100 publication.