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

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Jan 25, 2013
Here is a little stat that might put Apple’s (AAPL, Financial) 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, Financial) 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, Financial) 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 listof 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.