Paul Sheehan
Date January 17, 2013
Sydney Morning Herald columnist
It is possible to explain how the cultural, commercial and corporate juggernaut known as Apple became so uncool so quickly. It is much harder to understand why.
Four months ago, Apple was at a new zenith. Its shares were trading at $US705. Its market capitalisation was $US660 billion. All its major products were selling as fast as it could make them. Its Apple Stores were packed. Its profit margin was fat, about 45 per cent. And the company had so much money coming in, it was sitting on $US100 billion in cash.
Apple was hot and Apple was cool at the same time. It was on a trajectory to be the first trillion-dollar company, with expectations it would launch into the last great untapped mass market, television, with an iTV.
And then …
And then we started getting sour Apple. Not because of any conspicuous move by Apple, but because of what others thought about it. In the past four months, Apple has shed $US150 billion in market value, more than the entire market capitalisation of all but a select group of giant corporations.
After hitting $US705 in mid-September its shares have slid 31 per cent, smashing through the $US500 support barrier on Tuesday, closing in New York at $US485.92 ($460.59).
As the stock fell, market commentators pointed to numerous deficiencies with the company. Orders for screens for the iPhone 5 have plunged 50 per cent; problems with the iPad Mini; a shift in growth to emerging markets, which need products cheaper than Apple is offering; Samsung is shipping 100 million phones a month; the Apple Maps debacle; Chinese knock-offs; and young people deciding that Apple was no longer cool.
This last issue is a sore point. Buzz Marketing Group, which tracks the buying habits of teenagers, issued a negative report on Apple this week:
”Teens are telling us that Apple is done. Apple has done a great job of embracing Generation X and older, but not in connecting with Millennial kids [born in the 1990s and 2000s]. They are about surface tablets, laptops and Galaxy.”
This impression of the curse of being uncool among teenagers was reflected when America’s most influential (and entertaining) market analyst, Jim Cramer, spoke on CNBC, and to his 612,000 Twitter followers, about how his daughter has stopped liking Apple.
Some company analysts poured oil on the fire as Apple dropped through the $500 barrier by issuing downgrades on the company. Nomura Securities cut its price target for Apple this year from $US660 to $US530, saying its analysis suggested the realistic downside risk was potentially down to about $US400, with possible upside to about $US660.
A drop to $US400 would have been inconceivable four months ago.
All this may explain how market sentiment turned sour on Apple but the extent of the change defies logic. Apple is the opposite of a bubble stock. It is cheap by any measure.
The Standard & Poor’s stock index is trading at an average valuation of 15 times company earnings. Yet Apple, despite its success, is trading at only 11 times earnings, and just 10 times its forward earnings. This is a significant discount to the market.
In contrast, Facebook is a bubble stock, trading at a price to earnings multiple of 155, compared with Apple’s paltry multiple of 11.
It makes no sense, considering Apple is sitting on a mountain of cash, equivalent to $100 a share, so its share price is really $385.
Apple had a brilliant Christmas, so it is in a natural seasonal lull. Demand for all its products remains strong. Much of the company’s profits are coming from the enormous ecosystem it has created around itself.
Apple has sold 40 billion apps, with half of those sales in the past year. In December, it set a new monthly record with 2billion app sales.
The Apple ecosystem is now so large it has more than 500 million active accounts with its App Store, which stocks more than 775,000 applications for iPhones, iPads and iPods, and the company has paid more than $US7 billion to app developers.
Not all analysts agree with Nomura. Hudson Square Research has issued a share price target of $US900 for this year, based on modelling which sees improved earnings and strong existing demand for all of Apple’s products. This is logical, given that if Apple were simply trading at the average multiple, 15 times earnings, its share price would be $US750. And if it were trading on projected earnings for this year it would be $US850.
From here, Apple still looks nutritious.
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