There have been many articles in the tech industry lately pointing out that the market capitalization of Apple now exceeds that of Microsoft and Google - combined! To think that about a decade ago, Apple was at death’s door hemorrhaging cash and seemed destined to go down in the history books as a cautionary tale. A year ago, it was big news that Apple might exceed the value of their longtime nemesis, Microsoft. Today, they are the most valuable company in the world.
Can Apple really be this valuable? Well, they are a publicly traded US company, so plenty of information is readily available. As of today, their trailing twelve month price to earnings ratio is 14. Historically, stocks are considered to be “fairly valued” with a P/E ratio of about 15. Is it possible that not only is Apple worth every penny it is currently valued at, but it might also be undervalued?
The stock market, to borrow from Janet Jackson, is a very “What Have You Done For Me Lately” game. The P/E ratio is an important metric, but it is a backwards looking metric and only tells the analyst what has happened. Any rational trader is far more interested in what will happen. As in any market driven exchange, a bull and a bear case can be made for Apple.
From the bull’s perspective, Apple is the only computer OEM (Original Equipment Manufacturer) that is showing signs of growth. MacBooks and iMacs experienced positive 26% year over year growth while rivals such as Dell, Lenovo, and HP are seeing negative growth. However, even though the Mac operating system is growing, 70% of Apple’s revenue is coming from its iOS devices. This is a category that did not even exist six years ago. Before the iOS devices, the iPod had conquered roughly 75% of the MP3 market and iTunes was the dominant legal download service. Apple boldly introduced new products that have taken the world by storm and created a new product category with the iPad. Apple’s last quarter was an absolute blowout beating even the most optimistic of any analyst’s expectations.
Apple has been successfully creating new products, revitalized its core computer line, created a new sales strategy with branded retail stores, and is a top recognized brand in the world. During all this success, they have created favorable terms for their components and manufacturing and hoarded a staggering $100 BILLION USD in cash reserves. The market for smartphones and tablets is still in its infancy, as there are plenty of new consumers to target with future iPhones and iPads. The company has executed flawlessly under the guidance of the late Steve Jobs and the transition to Tim Cook seems to be a smooth one. With a P/E below historical norms and a PEG ratio of .6, the bulls can make a strong case that Apple is incredibly undervalued.
To be fair, there is a bear case to consider as well. Yes, Apple has produced impressive results, but this is the tech industry where the only constant is change. Will Tim Cook’s leadership be as effective as the Steve Jobs’? Will the labor conditions at the FoxConn manufacturing plants lead to consumer boycotts? Will increasing competition from Microsoft and Android end the very high margins that Apple currently enjoys on its iOS devices? Will the market for shiny gadgets saturate sooner rather than later? Will Apple make a strategic misstep?
These are all valid questions and there are no real answers. Before the iPhone, the Blackberry was considered absolutely essential to corporate users. It was known, affectionately, as the “Crackberry” because they were considered addictive by their users. Now, Research in Motion - the company that makes Blackberry products; is losing revenue, shedding jobs, launching ill conceived products, and constantly in talks of being a buy out acquisition. Just five years ago, they were king of the world and now they are in last place in the smartphone wars, defeated in every way by competitors who were not even in their market at the time.
Some bears believe that Apple cannot continue to innovate at their current pace. The competitors will continue to make products that are similar and undercut Apple on price. Backlash against their heavy handed developer contracts and lack of control of their devices might be their undoing. All of the scenarios are very real possibilities.
Every weekday (except holidays), investors from around the world vote with their dollars on the future value of Apple. For every single share that is bought, there must be a seller. The seller is implicitly stating that they believe the best days for Apple are behind them (or they need the money). The buyer is stating that they believe in the future of Apple as a company and that they will continue to see further appreciation in the stock. Millions of shares are changing hands every single day bought and sold by anyone from an individual investor in their living room to large mutual funds. There are ups and downs and no one can claim to know the future of the company. In the long run, the bulls may be right, but it could just as easily be the bears.
Although Apple is the most valuable company in the world, one never hears anyone refer to an “Apple bubble”. This is a real company, making real products, bought by real consumers. The financial metrics to value this company, if anything, point to a company that may be undervalued. This undervaluation may or may not be rational due to the significant risks Apple faces in the market. Buyers of Apple stock are not Greater Fools or participating in some type of Apple Ponzi Scheme - even if its growth decelerates, the stock is not priced to perfection.
In short, Apple is the exact opposite of the Australian housing market. Every key metric - price to rent, price to income, debt to GDP, etc. is not just overvalued. It is EXTREMELY overvalued. There is no rational explanation for the incredible run up in home prices over the last decade. Since residential property is no longer tied in any conceivable ways to its fundamentals, there is no explanation other than it is a bubble, driven by emotions, and bound to pop. Very recent history has shown the old mantra “you can’t go wrong with real estate” is patently false. Home values in the United States, the UK, Spain, and Ireland have fallen 40-60% from their bubble peaks. The swift increase in home prices in Australia has already eclipsed the run ups in the previously mentioned countries who have seen their bubbles burst. There is no other possible outcome.
Disclaimer: Between Julie and myself; we own one MacBook Pro, two MacBook Airs (one was provided by Julie’s work), two first generation iPads, and two Apple TVs. We have each owned the original iPhone, the iPhone 3GS, and two iPhone 4’s (we sold our US phones before leaving and got new iPhones in Oz). I have been accused of being an Apple fanboy. Although I believe this takes things too far, I do tend to buy their products and have a certain degree of loyalty to them. That being said, I do not own a single share of Apple stock. I do not advocate buying or selling Apple - it is really hard to say if it is fairly valued or not, but if ever there were a company that I would call fairly valued, this would be it. Please do not take my very rudimentary analysis as financial advice to either buy or sell Apple stock. However, if you own residential property in Australia, immediately build a time machine and sell it in 2010.
Can Apple really be this valuable? Well, they are a publicly traded US company, so plenty of information is readily available. As of today, their trailing twelve month price to earnings ratio is 14. Historically, stocks are considered to be “fairly valued” with a P/E ratio of about 15. Is it possible that not only is Apple worth every penny it is currently valued at, but it might also be undervalued?
The stock market, to borrow from Janet Jackson, is a very “What Have You Done For Me Lately” game. The P/E ratio is an important metric, but it is a backwards looking metric and only tells the analyst what has happened. Any rational trader is far more interested in what will happen. As in any market driven exchange, a bull and a bear case can be made for Apple.
From the bull’s perspective, Apple is the only computer OEM (Original Equipment Manufacturer) that is showing signs of growth. MacBooks and iMacs experienced positive 26% year over year growth while rivals such as Dell, Lenovo, and HP are seeing negative growth. However, even though the Mac operating system is growing, 70% of Apple’s revenue is coming from its iOS devices. This is a category that did not even exist six years ago. Before the iOS devices, the iPod had conquered roughly 75% of the MP3 market and iTunes was the dominant legal download service. Apple boldly introduced new products that have taken the world by storm and created a new product category with the iPad. Apple’s last quarter was an absolute blowout beating even the most optimistic of any analyst’s expectations.
Apple has been successfully creating new products, revitalized its core computer line, created a new sales strategy with branded retail stores, and is a top recognized brand in the world. During all this success, they have created favorable terms for their components and manufacturing and hoarded a staggering $100 BILLION USD in cash reserves. The market for smartphones and tablets is still in its infancy, as there are plenty of new consumers to target with future iPhones and iPads. The company has executed flawlessly under the guidance of the late Steve Jobs and the transition to Tim Cook seems to be a smooth one. With a P/E below historical norms and a PEG ratio of .6, the bulls can make a strong case that Apple is incredibly undervalued.
To be fair, there is a bear case to consider as well. Yes, Apple has produced impressive results, but this is the tech industry where the only constant is change. Will Tim Cook’s leadership be as effective as the Steve Jobs’? Will the labor conditions at the FoxConn manufacturing plants lead to consumer boycotts? Will increasing competition from Microsoft and Android end the very high margins that Apple currently enjoys on its iOS devices? Will the market for shiny gadgets saturate sooner rather than later? Will Apple make a strategic misstep?
These are all valid questions and there are no real answers. Before the iPhone, the Blackberry was considered absolutely essential to corporate users. It was known, affectionately, as the “Crackberry” because they were considered addictive by their users. Now, Research in Motion - the company that makes Blackberry products; is losing revenue, shedding jobs, launching ill conceived products, and constantly in talks of being a buy out acquisition. Just five years ago, they were king of the world and now they are in last place in the smartphone wars, defeated in every way by competitors who were not even in their market at the time.
Some bears believe that Apple cannot continue to innovate at their current pace. The competitors will continue to make products that are similar and undercut Apple on price. Backlash against their heavy handed developer contracts and lack of control of their devices might be their undoing. All of the scenarios are very real possibilities.
Every weekday (except holidays), investors from around the world vote with their dollars on the future value of Apple. For every single share that is bought, there must be a seller. The seller is implicitly stating that they believe the best days for Apple are behind them (or they need the money). The buyer is stating that they believe in the future of Apple as a company and that they will continue to see further appreciation in the stock. Millions of shares are changing hands every single day bought and sold by anyone from an individual investor in their living room to large mutual funds. There are ups and downs and no one can claim to know the future of the company. In the long run, the bulls may be right, but it could just as easily be the bears.
Although Apple is the most valuable company in the world, one never hears anyone refer to an “Apple bubble”. This is a real company, making real products, bought by real consumers. The financial metrics to value this company, if anything, point to a company that may be undervalued. This undervaluation may or may not be rational due to the significant risks Apple faces in the market. Buyers of Apple stock are not Greater Fools or participating in some type of Apple Ponzi Scheme - even if its growth decelerates, the stock is not priced to perfection.
In short, Apple is the exact opposite of the Australian housing market. Every key metric - price to rent, price to income, debt to GDP, etc. is not just overvalued. It is EXTREMELY overvalued. There is no rational explanation for the incredible run up in home prices over the last decade. Since residential property is no longer tied in any conceivable ways to its fundamentals, there is no explanation other than it is a bubble, driven by emotions, and bound to pop. Very recent history has shown the old mantra “you can’t go wrong with real estate” is patently false. Home values in the United States, the UK, Spain, and Ireland have fallen 40-60% from their bubble peaks. The swift increase in home prices in Australia has already eclipsed the run ups in the previously mentioned countries who have seen their bubbles burst. There is no other possible outcome.
Disclaimer: Between Julie and myself; we own one MacBook Pro, two MacBook Airs (one was provided by Julie’s work), two first generation iPads, and two Apple TVs. We have each owned the original iPhone, the iPhone 3GS, and two iPhone 4’s (we sold our US phones before leaving and got new iPhones in Oz). I have been accused of being an Apple fanboy. Although I believe this takes things too far, I do tend to buy their products and have a certain degree of loyalty to them. That being said, I do not own a single share of Apple stock. I do not advocate buying or selling Apple - it is really hard to say if it is fairly valued or not, but if ever there were a company that I would call fairly valued, this would be it. Please do not take my very rudimentary analysis as financial advice to either buy or sell Apple stock. However, if you own residential property in Australia, immediately build a time machine and sell it in 2010.
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