Is Apple (AAPL) A Bubble?

Dunstan Prial has penned quite an interesting article on Fox Bussiness where he skeptically questions Apple’s (AAPL) ability to keep the mega-hits coming while comparing the stock trajectory of the world’s most valuable company — Apple’s shares have catapulted by more than 400% in the past 60 months — and nearly 70% in fiscal 2012 alone — to both the run up in Internet stocks during the late 1990s and last decade’s real estate bubble.

The recent nosedive however, in the value of Facebook (FB), Groupon (GRPN), Zynga (ZNGA) and other over-valuated social media stocks, whose current market capitalization have shrank to a tiny fraction of their peak value, has brought back painful memories of dotcom bubble days with investors/traders throwing money into companies with shaky financial metrics that didn’t justify the stock price – buying basically the stock rather than the fundamentals of the company.

According to Prial, there are bubble parallels with what is happening now to Apple shares. And they are many. In fact, if we compare Apple stock chart against the Nasdaq’s dotcom boom chart the similarity are quite striking.

“Much like the past manias for dotcom stocks, the demand for Apple’s stock is based on two separate but equally false premises”, writes Prial. ” The first is that Apple is somehow different than other companies, that demand for its products will grow unabated forever.”

“As innovative and successful as Apple has been in the past five years,”continues Prial, “its financial metrics don’t justify the stock price and haven’t for a long time. Like many tech companies before it, whether people want to admit it or not, people are buying the stock rather than the company, and that rarely ends well.”

Rob Enderle, president of the Enderle Group, seem to echo Prial’s analysis. He has predicted that in fiscal 2013 Apple will face fierce competition in the smartphone and tablet markets from rivals such as (AMZN), Microsoft (MSFT), and Apple’s legal foe and main competitor Samsung Electronics, whose products run on Google’s (GOOG) Android platform. Enderle also believes that “anyone who thinks Blackberry maker Research In Motion (RIMM) [is history] is making a mistake.”

That last point made by Prial is that Apple’s stock can’t possibly sustain its meteoric upward trajectory forever.

“At Apple’s current price to earnings ratio of nearly 16, investors have an expectation that the company will continue to grow revenues at levels mirroring those achieved over the past decade, as Apple rolled out one successful product after another — the iPod, iPhone and iPad devices, and all of their various updates. That’s unlikely to happen.”

Prial says investors need look no further than Microsoft  for proof that “all companies are vulnerable to rapid shifts in technology and in consumer demand for that technology.”

Microsoft’s shares have been stagnant for years at the $25-$35 range, going absolutely nowhere the past decade as the company has suffered serious execution problems on the innovation side precisely because, as Prial points out, “no company is immune to periods of stalled growth.”

AAPL closed last session up $4.17, or 0.62%, to $680.44. Day’s range $675.77 – $682.48.

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10 Comments on Is Apple (AAPL) A Bubble?

  1. No doubt it won’t last “forever” but at a price to earning of less than 15, this is no bubble. It’s just a value and growth opportunity right now but if they run into competition in 10 years, it will then be time to sell.

  2. As soon as you quoted Rob Enderle I stopped reading. This guy has been wrong every time he opens his mouth or his fingers touch a keyboard.

    I did get through the part where Prial says, “The first is that Apple is somehow different than other companies, that demand for its products will grow unabated forever.”

    I agree that demand for its products won’t grow forever … but “forever” is a really really long time. Where’s the argument that demonstrates that demand for their products won’t continue into the foreseeable future (the “forever” that most people can relate to)? Demand for their products isn’t tapering off; it’s growing.

    And Apple IS somehow different from most other companies. From Steve Jobs on down the line, their mantra has always been to make the best products that they can, and let the profits take care of themselves. (Unless you think they’re just lying when they say that.) Most other companies allow the sales guy to run the company, but at Apple the people who run the show make stuff that THEY THEMSELVES want to use. Big difference.

    Warn me when you see this changing.

  3. RIM has been slowly dying for years and will probably go out of business. They were the first successful smartphone but their OS has always been their achilles heel.

    Apple is still undervalued compared to their earnings…more innovative products to come…ipad mini, apple TVs, etc.

  4. “The first is that Apple is somehow different than other companies”

    in fact, it is different than most if not all: 1) it integrates its own software/hardware/ecosystem
    2) it has no debt 3) its margins are higher than most and 4) it supply chain management is world class.

    when these things change, perhaps it might be considered overvalued. until then, likely not.

  5. Funny, if you look at a chart of Apple’s profits over the last 60 months, the increase is even more extreme than the rise in Apple’s stock price.

    Where’s the bubble here? The stock price is simply tracking the nearly unbelievable financial performance of the company.

    A company with 100 billion in annual sales, growing revenue and earnings at greater than 40% per year, and with a P/E of less than 15? If this were any company other than Apple, the author would be screaming “fire sale!”.

  6. @beltwaygreg. A P/E ratio of 15 is ideal. You want to be between 10 and 20 for P/E. the closer to 10, the better. Over 20 and the stock is over valued. A P/E ratio of 300+, please stay far away.

  7. AMZN = over-valued bubble stock

    Apple is doing well on fundamentals, not speculation. Their forward P/E ratio (calculated from this year’s earnings) is incredibly low and somehow the author of the source article seems to miss that.

    The dot-com boom of the late 90s was not based on fundamentals — it was based purely on speculation with companies that had future profit forecasts that were out of this world. AAPL is producing the revenue and profits today that more than justify the price. They have zero debt and their market share is far from saturated.

    AAPL has at least two more years of growth before hitting market saturation and then leveling off. If Apple introduces a new product line that takes another sector by storm then they have the potential for growing beyond the next two years. Apple’s main business are smartphones (iPhone is still expanding market share annually and the smartphone market is still growing) and tablets (iPad is the dominant player in a market that is growing faster than smartphones with Windows 8 looking highly questionable as a challenger at the moment and Android having failed as a challenger repeatedly).

    The comment that should have stood out as proving the idiocy of the author of the source article is when he says “don’t count RIM out”. RIM is a one-trick pony (email-based smartphones). They are trying to reenter the smartphone market with something that plays catch-up to two major players and a third contender (Microsoft) who has put the weight of their company behind Windows Phone. RIM stands a snowball’s chance in hell.

  8. That’s like saying, back in the fifties, that either GM, Ford or Chrysler were doomed to fail and disappear … simply because the industry was always changing, and so was the competition. Sure Apple will face it’s challenges, but this successful, well talented company …. will no doubt survive successfully for many many years.

    Just like with iTunes, if Apple perfects their new “TV/Cable development” …. they may well indeed be around for a very long time to come.

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