There is a doubt that crops up often. Is Apple (AAPL) today the parallel to Cisco (CSCO) during the tech bubble? Is buying Apple now the same as buying Microsoft (MSFT) back in 2000? It's a scary doubt, since those stocks languished for the next decade even in the face of improving profits. And those stocks, too, had their moment of glory before putting on that gory performance. In this article, I will try to establish whether those worries are valid.
First, some history
Back in 2000, among great euphoria, stocks like Microsoft and Cisco put on extraordinary performances. In the run-up to Nasdaq's ultimate March 2000 top, Microsoft went from a split and dividend-adjusted $4 (around $80 at the time) in January 1996, to a high of $45.18 ($119.12 at the time) in December 1999. Cisco topped out at a split and dividend-adjusted $77.09 ($80.06 at the time), having also risen from a split and dividend-adjusted $4 at the start of 1996.
These were extraordinary runs, Cisco went up 1827% during those 5 years, Microsoft put on 1029% in the same timeframe.
Yet, given what happened next, one can easily understand the Apple worries. In the next 12 years, Microsoft lost almost 40% of its value, and Cisco a bit over 72%. And what's more, earnings kept on rising throughout these 12 years. The chart below illustrates TTM net profit for Cisco and Microsoft. It can clearly be seen that even with all the ups-and-downs, earnings are much larger now than they were back then, so earnings were ultimately not the issue.
So could Apple be another Cisco/Microsoft?
Apple had a run of its own. Going back a bit more than 10 years, to March 2002 when Apple introduced the iPod, Apple had a split and dividend-adjusted quote of around $12. It then rallied over the years, with the successive "iProduct" revolutions, until it hit $696.91 in September 2012. This made for a 5707% performance over this time period. Extraordinary, even by Cisco/Microsoft bubble standards.
Given this scenario, and also Apple's recent growth slowdown both in revenues and earnings - guidance implies profits will fall next quarter - the fears that Apple could be another Cisco/Microsoft, a dominant, profitable, player that nonetheless sees its shares languish, are easy to comprehend. And sure enough, over the last few months, Apple went on to lose a full 37% of its market capitalization - almost as much as Microsoft actually lost over the last 12 years.
But the question remains, knowing what we now know, is Apple really comparable to Cisco and Microsoft at the top of the tech bubble? I'll answer using Apple's TTM earnings versus what Cisco and Microsoft were worth at their peaks, and their 1999/2000 earnings.
And the answer is…
Apple earned $44.11 per share over the last 12 months. At the peak (an adjusted $696.91) this meant Apple was trading at 15.8 times earnings (never mind the cash). Today, at $439.88, it's trading at a round 10 times earnings. What about Cisco and Microsoft in their glory days?
Microsoft had its peak at $119.12 (unadjusted), and its earnings for the most recently-completed year, ending in September 1999, were $1.42 per share. This means Microsoft was trading at 83.9 times earnings.
Cisco had its peak at $80.06 (unadjusted). Its earnings for the year ending in July 2000 were $0.36 per share. This means Cisco was trading at 222.4 times earnings when it topped out.
Having calculated this, we can finally arrive at an answer. Apple is not comparable to Cisco or Microsoft. Although Apple had a run which could rival those shares as they headed into their bubble peaks, Apple's earnings kept pace. So instead of trading at bubble valuations like Microsoft or Cisco had at their tops, Apple actually trades wildly on the cheap.
Many things can still turn against Apple, making it lose its extraordinary market position. Competition can increase. Margins can decrease. Steve Jobs might have made a difference and he's not around anymore. But one thing we know for sure - the valuation effect which made for horrendous long-term performance by both Microsoft and Cisco is something that simply is not present regarding Apple. The fear of Apple possibly being the same as Microsoft or Cisco circa 2000 is misplaced. It's misplaced at today's quote, but it was already misplaced even at Apple's highs.
While there can be other reasons for Apple to underperform in the future, fears of a replay of Microsoft/Cisco's performance since 2000 is not one of them. Microsoft and Cisco did badly since 2000 because they attained completely unsustainable valuations at the bubble top and then spent the next decade growing into those valuations. Apple has never gotten to that stage, and hence any growth that it acquires will serve to propel the stock forward in the present and future.
If there is any comparison in today's market to Microsoft and Cisco back in 2000, that would be Amazon.com (AMZN). Amazon.com is likely to still be lower than today 12 years down the road. Maybe even much lower, given that its valuation today greatly dwarves even Cisco's at the bubble top.
On valuation grounds, Apple is a buy.
Disclosure: I am short AMZN.
Additional disclosure: I might buy Apple shares in the next 72 hours.