Apple has soared over the past two years from roughly $80.00/share to an all time of $251.00 and change/share. Apple has 30 strong buy ratings, 5 moderate buys, 3 holds, and 0 moderate and strong sells. The tech giant has also beat analyst estimates for the last 20 quarters thus partially explaining why the short interest is only 1.12% of its float. No wonder why virtually everyone has jumped on the Apple bandwagon. The other week, I was recommended by a friend to pick up and read Michael Lewis’ “The Big Short.” After reading the prologue in only a few short minuets, I learned of Lewis’ view on how some Wall Street doings, in particular, packaging and selling America’s growing debts was simply unsustainable. My post here is to argue that Apple, and its never ending appreciation, is unsustainable.
In its simplest form, the general public including many traders assumed real estate prices would rise to perpetuity, and if not, the millions at least ignored the existent probability that home prices could correct themselves. Needless to say, I am not writing this post to talk about the housing bubble but rather Apple. Millions of individual and institutional investors have been hyping about Apple. They say that Jobs’ is a genius (which I agree he is definitely the most influential innovator of our time) and that Apple is, and will always be, the leader in technology. I become concerned when I see such bias towards a never ending ruler, Apple that is.
Before I begin my brief analysis, keep in mind that the rating agencies (as I previously discussed) had positive ratings on mortgage related securities leading up to the crash. Downgrading credit after the fact does not really help any investor. So to the 30 analysts who have strong buy ratings on Apple, please, one of you become the outsider and try to downgrade the stock before it has its 50% correction in the coming years. Now Apple is obviously quite different than the credit/housing crisis. Apple has tangible products that are loved by everyone. Its products continually get the oooo’s and aahh’s. But competition, in time, will prevail. That is how a free market works. I became familiar with Buffet’s coined term, economic moat, when I did an internship at Morningstar helping analysts with whatever research they needed help with. Apple does have a strong brand and a lot of power in its space, but as everyone says, technology changes so fast and it is just a matter of time for other companies to start slowly making their way through those barriers Apple has set. When investors underestimate what competition can do to a leader, in this case Apple, they get hurt.
One of several considerations Morningstar uses when determining if a company has a wide economic moat (safe from competition) is high switching costs. Consider the following example: “Medical-device companies Biomet and Stryker benefit from high switching costs because, for example, a surgeon would have to forgo the comfort and familiarity of doing procedures with one artificial joint product. And because the surgeon would have to be trained to use competing products, he or she would also have to contend with lost time and money resulting from not performing as many surgical procedures.” –Morningstar
With smartphones and other communication/entertainment devices, it does not take much for a 16 year old teenager to switch to a new device from Apple’s because the new device is ‘cooler’ and possibly more useful.
Because I studied finance as an undergraduate, I am also well aware that stock prices are priced based on anticipated earnings or events. With Apple, any positive such as ‘blow-out IPAD sales’ seems to me to have been priced in the stock months ago. When Apple sometime in the future does not beat estimates, we will begin to see the depreciation. In theory, if analysts believe that Apple’s profits will level out in one a year, the stock price will begin to show it in only a matter of months. Similar to real-estate, prices kept rising and rising until that one day came around, and look where we are today.
Lastly, I am not a tech guy so I cannot write all day on the research/ development embedded in Apple’s products. But I do question why Apple has not issued a dividend considering that it has one of the largest market caps. Yes, capital is reallocated to its R&D, but I do not see how much there is to it when the ‘new and crazy’ product is really just a physically bigger or smaller version of an older product, plus or minus minimal modifications. Look, there are only so many devices that can come out that provide its users with different ways to e-mail or text message someone.
From an investment perspective, there is no way I would build a long position in Apple. They are reporting after the bell today so aggressive call buying for those traders to capitalize on another surprise does not astonish me. For the long term, I would go against Apple if not for the competition factor, to seek a lower correlation to the market. With the VIX low, investors who are long and EXTREMELY bullish with Apple, do not become complacent like many homeowners did with their property values, buy some protection or starting looking for the exit.
Full disclosure: Currently do not have any positions in the companies discussed.
