I have been warning about a major shift in Apple (NASDAQ:AAPL) for the past three quarters, and now what I warned about before is happening in front of our eyes. Apple is not the same company without Steve Jobs. The company became very greedy and did not treat its suppliers correctly, the competition caught up with it fast, and in many ways has surpassed the cutting edge that AAPL once was, and unless Apple can somehow regain that cutting edge status the fickle consumer will look elsewhere. Except for the die-hard Apple fans, some of whom will never consider a PC, consumers will not be destined for another iPhone, or iPad, or even an Apple TV, unless those products are simply better than the competition with a competitive price point. Apple cannot grow without the masses, and Die-Hard Apple followers cannot support the company on their own.
If this is true and earnings pressure starts hitting Apple, something else very concerning is also likely to take place. The IT sector grew EPS at 4.01% in Q3, and revenue grew at 2.82%. This sounds like a decent number, but the P/E multiple for the Tech sector is over 15, and that makes its price/growth rate very rich. Whether you look at Vanguard IT Sector ETF (NYSE:VGT), NASDAQ 100 ETF (NYSE:QQQ), or any other IT ETF you can see the multiples are at or above 15 times earnings, but the sector is only growing at 4.01%. That means the valuation is almost 4 times the growth rate, which is much higher than the normal valuation, 2.5 times.
However, almost all of that growth came from AAPL. When we remove AAPL from IT the EPS growth rate changes to 1.39% for the IT sector and the revenue growth rate for the IT sector contracts to -0.46%. Without AAPL the IT sector looks much different than it might have before, and an already rich multiple looks far richer than it did when AAPL was offering staggering growth rates. If the reports are correct and AAPL is now planning to ship half of what it had planned before the positive influence of AAPL will be erased, and valuation questions will come into play. Instead of almost 4 times growth, IT will be valued at over 11 times growth, and I don't know any prudent investors who are willing to pay that for anything unless there is some revolution that is set to cause growth rates to explode in the coming years, and there is nothing like that on the forefront. IT looks rich, and it is an avoid. For compaison purposes, the S&P grew EPS at about 4%, it is also rich, but not nearly as rich as IT would be without AAPL.
The strongest and weakest companies in the IT sector in Q3 2012 are listed below.
Strongest Revenue Growth:
Weakest Revenue Grwoth: