Everyone wants to talk about Apple Inc. – or “Crapple,” as at least one person referred to it on Twitter last week. A 25 per cent decline in 10 weeks will do that (never mind the 30 per cent gain for 2012 that remains in place).
So I have carefully reviewed the commentary and am here to give you definitive prognosis for what Apple stock will do in the next 12 months: Nobody knows.
Apple has become, in the words of a Globe colleague, “a blank canvas on which people can paint whatever story they choose.” And while there’s a thoughtful case to be made that Apple shares can return to the $700 (U.S.) level, the stock has been taken over by traders and speculators, which makes an “investment” in Apple all the more risky.
A fair amount of the current bear case sounds familiar. To get some perspective, I went back in time to a story I did in January, 2010, when Apple traded for $200, that profiled the only analyst who had a “sell” rating on Apple. (After trading for more than $700 this year it is now puttering around $530.)
Per Lindberg of MF Global believed the worldwide smartphone market would grow to $80-billion in 2012 and grow in the single digits thereafter; he also saw an industry wide profit margin of 10 per cent, or $8-billion in pretax profits.
This turned out to be too conservative, to be polite. In fact, so were the bulls quoted in the story; one analyst said “There isn’t any reason Apple can’t double its revenue base in three to five years and be a consumer electronic company that does roughly $100-billion [in sales].”
Apple hit $108-billion in fiscal 2011 and $156-billion in fiscal 2012, which closed in September. And while the company’s earnings per share were about $9 in fiscal 2009 – when these forecasts were made – they are now a hair under $45 per share, a fivefold increase in three years.
So, to be obvious, Apple spent the last two years growing far faster than nearly everyone expected; iPhones were adopted at a faster pace, and the iPad, only a rumour three years ago, was a gigantic hit. So perhaps the company is being underestimated once again?
The doubts about Apple’s growth that were wrong before may now, however, finally be right. The challenges of growing a $50-billion company, which Apple met, are less formidable than those of growing a $150-billion company.
The growth pessimism is why Apple’s current price-earnings multiple is out of whack with past results: It’s trading for under 11 times next year’s earnings estimate, or about eight times when you strip out Apple’s roughly $125 per share in cash and investments.
Some bulls see the company reaccelerating its growth in sales and profits: Analyst Brian White of Topeka Capital believes Apple will double its P/E to 21; he has a 12-month target price of $1,111.
It’s more likely that while Apple can continue to grow, it will finally begin to grow more slowly, and also combine that with shrinking profit margins – a combination that analyst Steven Milunovich of UBS Investment Research notes meant the end of P/E expansion at Google and Microsoft.
And yet, you can still build a case for Apple shares to rebound despite slowing growth: Morningstar’s Brian Colello crafts a fair-value estimate for Apple shares of $770 by assuming average revenue growth of 19 per cent per year from fiscal 2012 to fiscal 2016 – versus the average of 54 per cent in the last three years – and slightly lower operating margins averaging 31 per cent.
Does any of this rational math matter, though? I don’t know. I wrote recently that the Apple Maps fiasco, where the company dropped a perfectly serviceable Google app for an inferior product of its own making, was a warning sign that Apple’s ethos of quality may be waning. Since that time, Apple CEO Tim Cook did the right thing, in my mind, by apologizing and sacking the executives responsible. A fair amount of the commentary, however, seemed to bemoan the fact that Mr. Cook was acting like an ordinary CEO, not like his iconoclastic predecessor.
It was Steve Jobs, in fact, who coined the phrase “insanely great” to describe Apple’s products; as a 20-year user of them, I happen to agree. Apple stock, however, has become too maddeningly volatile to be an insanely great investment.
Just how big is Apple?
From Evercore analyst Rob Cihra:In the first nine months of 2012, Apple’s year-over-year revenue growth of $29-billion (U.S.) “effectively mirrors” the $26-billion combined revenue decline of Dell Inc., Hewlett-Packard Co., HTC Corp., Intel Corp., Nokia Corp. and Research In Motion Ltd.
Mr. Cihra estimates Apple’s December-quarter year-over-year revenue growth will be 1.3 times the combined gains of Dell Inc., Hewlett-Packard Co., HTC Corp., Intel Corp., Nokia Corp. and Research In Motion Ltd., Amazon Inc., Google Inc., Samsung Electronics Co. Ltd. and Microsoft Corp.