Why the stock market is so often wrong about Apple

Philip Elmer-DeWitt is a senior editor at Fortune.

Click to enlarge. Source: Asymco

FORTUNE -- Asymco's Horace Dediu, one of the smartest analysts following Apple (aapl), has often confessed that the relationship between the company's performance and the price of its stock is beyond his understanding.

But in a post published Monday morning he may have found the key.

He's made a study of 13 bear markets -- periods where Apple's stock price suffered extended declines -- starting with the launch in Oct. 2001 of the product that would usher in Apple's renaissance: the iPod.

You might think the market would reward Apple for introducing so disruptive -- and profitable -- a product. But you would be wrong. Having already fallen 70% year over year, the stock fell another 20% after the iPod arrived.

In the chart above, the top-most blue bar represents the first bear market Dediu studied -- the 154 days in 2001 between April 27 and Sept. 28 that Apple's shares fell 38%. He charted a dozen similar bear markets, paying particular attention to the ones following the launch of the iPhone in 2007.

The bars on the right that start in 2007 represent the growth in Apple's earnings per share in the two quarters following an Apple bear market.

And there's the disconnect. Every dramatic drop in share price since the launch of the iPhone has been followed by a surge in earnings growth. "One could even say," writes Dediu, "the worse the bear, the better the growth."

It's counterintuitive, but drawing on disruption theory Dediu believes he's identified the perverse logic behind the pattern:

When a product is understood the stock is mildly desirable. When a new product appears the future is hazy and the stock is undesirable. But that haziness hides potential [both] up and down. New products is what innovators produce. Bizarre new products is what disruptors produce.

In other words, the paradoxical observation in the chart above of “the more drama in the market, the more success in the marketplace” makes sense when inverted.

For disruptive companies, it should be “the more success in the marketplace, the more drama in the market.”

In that sense the current downdraft may be quite auspicious.

Dediu's piece is titled "On not being boring: A dramatic reading of Apple’s share price." You can get it here.

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