Apple and Imperfection

by Steve Wildstrom   |   January 23rd, 2013

Apple-Think Different

Near the end the dot-com bubble, smart investors finally realized that a major problem with tech stock pricing was that dozens of companies were priced to perfection: Their stock prices were so high relative to the underlying financials that only a perfect performance could justify the share price for any length of time. Very few companies could deliver perfection and the house of cards folded.

Apple these days seems to be the opposite of a bubble dot-com. Despite a depressed stock price–it was trading at a very mediocre 11.6 times trailing earnings before accounting for a sharp after-hours post-earnings plunge. Apple has now given up all the gains of the past year,

And while I am no financial analyst, this is ridiculous. The sharp run-up in the stock that ended abruptly this fall was fully justified by the company’s stellar performance and even at its peak, Apple was still underpriced by most fundamental metrics. Two things have been true about Apple’s performance for some time: Its margins and growth rate were both unsustainable. But in a reasonable world, there was room for both to decline, as they have, and for shares to keep rising, as they most certainly haven’t.

Apple has always been a stock that traded heavily on emotion rather than analysis and now is no different. If pessimists want to drive it lower, they mill, despite a P/E heading for single digits and a price that’s just a bit more than three times the cash on hand.

Disclosure: I do not have any direct position in AAPL stock, though funds I invest in may.

 

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Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • rattyuk

    I think Horace tweeted that if you back the cash out Apple is trading at 7.1!

    • boristhefrog

      OK… so if AAPL is trading at 7.1x then the next exercise is to look at all the companies trading at or around that multiple and figure out which ones would be good buys… even stocks trading at 9x or 10x… My prediction… AAPL would stand out by a country mile as the best buy…

  • Rich

    “Apple has always been a stock that traded heavily on emotion rather than analysis.”

    I have no problem believing that. There always seems to be a lot of emotion around discussions of that company and I’m not sure why, but it’s interesting.

  • stefn

    Apple’s figures were confirmed as the best quarterly results ever recorded by ANY company in the history of our planet, but Wall Street was disappointed.

  • Mayson

    To one significant digit, backing out cash, both Apple and Amazon are selling at 2 X (estimated 2013) sales.

    • Ndellos

      True. But one has single digit PE after removing cash and one has 3500 PE and a load of debt.

  • Ndellos

    AAPL is currently being gamed on a massive level by people who are orchestrating a fantastic negative campaign. I admire their thoroughness and creative use of media. With growth rates for their tech categories still deep in double digits, a 5% loss of margin at AAPL is more than offset by what promise to be 15%-20% gains annually in units sold, and even market share losses (never going to happen) would still give more than enough earnings for 5 years to get to 20x p/e after cash. Again, brilliant Wall Street manipulation.

    • steve_wildstrom

      I can’t explain why Apple stock behaves the way it does, but I think the conspiracy theorizing is getting out of hand. The only people with an interest in seeing the stock price go down are those who are short AAPL, but the fact is that there just aren’t a whole lot of Apple shorts. According toe 24/7 Wall St., short interest in apple fell by 0.4 percentage points to about 2% over the last week. For an extreme contract, about 27% of BlackBerry shares are short.

      So whatever is driving Apple’s price down, it doesn’t seem to be a conspiracy of shorts. And I can’t find other potential conspirators. It just seems that the institutional investors who were deeply in love with Apple six or nine months ago have fallen out of love. So it goes.

      • Ndellos

        Steve I hear you and the short numbers are low. I think it is more people writing naked calls and buying puts, in LEAP or monthly varieties. The stock always magically finishes at an option number that wipes out the majority of options written by people who are expecting the stock to respond based on fundamentals and a one year outlook.

        It is sort of a shake out to which the company doesn’t care to respond.
        AAPL also as a company does not care about stock price, and has made that clear, so that type of attitude is partly at fault as well.