New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Value Ideas and Strategies
Share and discuss value investing ideas and investing strategies.
New Topic
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicLog In
Apple's Improbable Math
Posted by: Barry Dunaway (IP Logged)
Date: October 8, 2012 03:31PM

Apple’s original corporate logo depicted Isaac Newton reading under the shade of a tree, an apple dangling from a branch overhead. The story goes that the young Newton was inspired to his theory of gravity when the apple dropped on his head. Four centuries later, investors in Apple Inc. are about to re-discover that gravity can still leave a bruise.

It was in late August that Apple became the most valuable U.S. company ever, surpassing the $620 billion market cap that Microsoft reached in 1999 during the tech stock mania. Far from becoming nervous about the record price, Apple enthusiasts have been cheered by sales of the new iPhone 5, prospects for an iPad mini, the potential of a breakthrough TV service and the seemingly unlimited growth potential in emerging markets. Doubts about the stock have been mollified by a seemingly low PE ratio of 15x expected earnings and near-unanimous “buy” ratings by Street analysts. There was even some comfort, oddly, in the observation by S&P Capital IQ that Apple would need to reach $900 per share before it would exceed the “inflation-adjusted” price of the old, bubble-induced Microsoft record.

Can the stock actually provide a decent return at today’s price? After seeing shares rocket 58% year-to-date through Monday, it’s hard to imagine new Apple shareholders being satisfied with a pedestrian gain of 10% in the coming year, but achieving even this would require a Herculean effort.

To gain that 10%, Apple would need to add $60 billion in market value. In the jumble of $1 trillion deficits and $100 billion bailouts, we’ve become so used to big numbers that we’ve lost sight of just how big they are. That additional $60 billion is more than the current market cap of more than 90% of the companies in the S&P 500. So, Apple would need to add value in the coming year greater than the current market cap of such giants as American Express, United Health, Union Pacific, Costco and Boeing. Don’t even think about how hard it will be to do this the year after that. The vaunted Apple ecosystem of devices, content and apps provides real business advantages, but the extraordinary profit the company enjoys invites intense competition that will make it harder and harder to stay ahead. Improvements to the iPhone and iPad are already becoming more evolutionary than revolutionary. And the expansion of open platforms like HTML5 promise to give consumers access to content and apps without the need to buy the high-priced devices sold by Apple. This may prove especially appealing as a chronically weak economy prompts buyers to look for ways to save money.

Doubtless the spectacular popularity of Apple products has led to a halo effect for the stock. Despite the popularity of books that highlight the dangers of letting emotion override rationality when making decisions, investors are still most comfortable going along with the crowd. That goes double for professional investment managers, who feel pressure to own a stock like Apple that bulks large in the S&P 500 and has posted big price gains. As Newton said in another moment of insight, “I can calculate the motion of heavenly bodies but not the madness of people.”

Barry Dunaway
Director of Research
America First Investment Advisors
Omaha, NE

Stocks Discussed: AAPL,
Rate this post:

Rating: 3.8/5 (26 votes)

Apple s Improbable Math
Posted by: yhlbb (IP Logged)
Date: October 8, 2012 05:53PM

If you say, because 99% of people weigh less than 500 lbs, it's impossible to have a person who weights 1,000 lbs, then I believe it's a true statement.

If you say, because 99% of people have a net worth less than 10M, so it's impossible to have a person whose net worth is 50B or more, then we know it's not true.

You need to read the "Black Swan" book to see how to distinguish the two.

BTW: "Einhorn said he consulted regulation, and there's no limit on $1 trillion market cap."

P.S. I am not trying to convince you to buy apple stock.

Stocks Discussed: AAPL,
Rate this post:

Rating: 2.0/5 (1 vote)

Apple s Improbable Math
Posted by: Barry Dunaway (IP Logged)
Date: October 8, 2012 07:50PM

Yes, Yhlbb, it's possible that Apple could reach a trillion-dollar market cap. It's also possible that Steve Jobs could come back from the dead. Unless the latter actually does occur, I wouldn't bet on the former.

Thanks for the tip on the Black Swan. As it happens, I've read all of Nick Taleb's excellent books. If you have, maybe you will recall his interesting character Fat Tony. Fat Tony is a fellow who understands a good deal about how the real world works. He knows that theoretical models are often used by overly confident experts, and he delights in taking money from these saps. I'd prefer not to be one of them.

Stocks Discussed: AAPL,
Rate this post:

Rating: 5.0/5 (1 vote)

Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)