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If Past Tech Bubbles are a Guide, Apple Has Further to Fall

January 25, 2013 | About:
Here is a little stat that might put Apple’s (AAPL) recent slide in perspective. From its peak at $705 per share to its recent trough at $450, the stock lost approximately $240 billion in market cap.

The current total market cap of Microsoft (MSFT) is just $233 billion. So, Apple has lost an entire Microsoft worth of market cap…and yet it is still the most valuable company in the world at $423 billion. (Exxon Mobil (XOM) is number two at $416 billion.)

I’m not knocking Apple; there are plenty of other people doing quite a bit of that already. I write this just to illustrate how truly overpriced Apple was at its top, particularly given how nonessential the company is to the global economy. If Exxon or Microsoft disappeared tomorrow (and took their products with them), the world as we know it would end and the global economy would grind to a halt. If Apple disappeared, we’d have to stop playing Angry Birds and updating our Facebook status for a while, but life would go on relatively unaffected.

But with all of this said, Apple is still the most profitable company in the world by a wide margin. After shedding well over a third of its value, is Apple worth buying?

Based purely on fundamentals, it would be tempting to say yes. Apple trades for just 10 times trailing earnings and at 3 times sales—about on par with Microsoft. The company’s long-term competitive position looks something iffy, as Samsung and other hardware makers using Google Android and (increasingly) Windows Phone have seized the all-important “wow” factor that allows Apple to charge such a large premium. But given the low P/E multiple, a fair bit of this is already factored into the share price.

Still, in the short term, Apple has the issue of overownership and oversupply. Apple was the safest stock for a professional money manager to own. To adapt an old market cliché, no one ever got fired for owning Apple. And if you didn’t own Apple, you had some explaining to do to clients angry about missing the boat.

How overowned is Apple? Insider Monkey compiled a list of hedge funds with outsized Apple exposure, and the numbers are ridiculous. Some had more than 20% of their portfolios in the stock. As the Apple bubble deflates, these managers and plenty others (as well as millions of retail investors) will be paring their losses and selling on any strength.

There may come a time when investing in Apple makes sense again. But it’s not today. As Microsoft, Intel, Cisco and the rest of the tech stocks that saw the biggest price bubbles two decades ago discovered, once investors fall out of love with a trendy stock, it can remained unloved for a long time. Microsoft, Cisco, and Intel are all still FAR below their old bubble highs.

Though the easy money has already been made shorting Apple, Apple is more attractive as a potential short than a long today.

Disclosures: Sizemore Capital is long MSFT and INTC.

About the author:

Charles Sizemore
Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


Rating: 1.7/5 (19 votes)

Comments

jonmonsea
Jonmonsea premium member - 1 year ago


There may come a time when investing in Apple makes sense again. But it’s not today. As Microsoft, Intel, Cisco and the rest of the tech stocks that saw the biggest price bubbles two decades ago discovered, once investors fall out of love with a trendy stock, it can remained unloved for a ...

does this apply to Apple? Why own INTC if not because it has low PE? Apple has an ecosystem of books and movies etc thru iTunes that even iPhone 3 users continue to use. It seems to me that Apple is statistically cheap and worthy of some consideration for value investors, even those who resisted getting aboard at $150. for the very same reason one would buy MSFT: low PE net of cash when you factor in dramatic drop in E.

Or do you view a major drop in earnings over the next few years? Boy would that cause the stock to crash! They might be able to buy back 50% of thencompany in that case.

marcolanaro
Marcolanaro - 1 year ago
Dear Charles,

I have trouble following your logic, I do not get why you imply that the market cap of a company should have some connection with its usefullness for society. To follow your logic then a farmer should be paid more than a major league baseball player since nothing would happen if baseball season is eliminated, we all would survive. Said that, based on current earnings it is cheap, on future earnings I have no idea but Apple's products are still great and I use them not only for playing Angry Birds or to look at Facebook, which I do, but also for my job and they perform perfectly for me. Anyway, you are right pointing to the fact that so many funds owned and ostill own Apple, that could be a source of troubble. Myself, I have never invested in Apple believing at each point in the last 5 years that it was to expensive, so if this a window of opportunity is one I am not taking, I love boring stocks and will stick to them.
Matt Blecker
Matt Blecker - 1 year ago
Charles,

As always I respect your analysis. However, I disagree on this one. Taking all factors into consideration, I think investors are reacting as wildly on the negative side to Apple now as they did positively in September and before.

We live in a world today where we demand instantaneous viewing of content such as e-mail, the internet, our work notes and schedules, as well as music, movies, pictures, and books. Apple provides some of the best devices for the viewing of this content. So in some respect people depend as much on Apple's products as they do on Exxon's or Microsoft's.

Smartphone sales totaled about 700 million for 2012. According to Gartner there were 1.7 billion total mobile phone sales worldwide (should be about this number once the final tally is out). Other firms with a stricter definition of "mobile phone" place the number at about 1.6 billion. While mobile phones are a mature slow growth business, the smartphone is not, as it only represents about 40-45% of total mobile phone sales worldwide, depending on which definition you use. As this number goes to 50% and then 60% and then 70% Apple will benefit. So will Samsung, Microsoft, and Google. The mistake some investors make is thinking its a zero sum game when in fact there is room for all these firms to thrive. If Apple simply captures just 10% of total mobile phone sales worldwide and 18-20% of smartphones, they will do just fine.

Although a significant portion of their profit is driven by smartphones, their other products will be a tailwind. Tablets are still in their beginning stages, as one research firm estimates the potential installed base at 800 million. With just 120 million sales in 2012 there will be major growth ahead for the next several years. Its very possible Apple will double tablet sales in the next 3 years. Even if the ASP declines to $400 b/c of cheaper iPads they will still make up much of that on volume due to the huge opportunity in emerging markets. In a tough environment for PCs, and I am one who still believes in the PC for enterprises as MSFT is also a top holding of mine, Macs continue to grow. Apple was the only major firm to grow PC sales in the US in 2012. And with nearly 800,000 apps, easy access to content, and a friendly ecosystem, many will still buy more than 1 Apple device and upgrade every few years.

In addition, their net cash and investments per share are just absurd at $137 billion, which equates to $145 per share. Even if you adjust for repatriation because Apple's average rate has been about 25% and not 35%, it is still about $130 per share! This is still growing and within a couple of years could be $200 per share or about half the current market cap, as it is currently about 1/3 of the market cap. Eventually management will be pressured to put this to work either through a strategic services-oriented acquisition, and/or higher dividends and buybacks.

It was certainly unreasonable to expect gross margins of well over 40% to continue. Apple even said so in their financial statements. Gross margins in the mid 30s and operating margins in the mid to high 20s are more reasonable. However, even if margins decline even more, either if Apple's ASPs decline or cost of doing business increases, much of this is already priced in. If you value Apple's business at a normal market multiple and account for the cash they have, the market is pricing in a 40-50% decline in earnings power. I think that is overreacting. If you really examine the numbers and also consider the first quarter of fiscal 2013 was one week shorter than the first quarter of fiscal 2012, the growth is actually still quite impressive, and ASPs held up well with the exception of the iPad due to the release of the iPad mini.

Its hard to value Apple because of margin uncertainty, but given all the positives and negatives, it is reasonable to think the company can grow earnings in line with GDP growth, say 2-3%, and even more so if they initiate a more aggressive buyback plan. So in 3 years if they are still earning $44-48 per share and have $200 per share in cash, it is not hard imagine the stock at $700-900 by 2015 or 2016 using a normal market multiple.

superguru
Superguru - 1 year ago
If MSFT disappears tomorrow, there will be no negative impact to economy. There are very good alternatives available for everything it does. It will actually spur innovation and will be good for economy.

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