Fear is a strong motivator, and the ongoing stampede by Apple (AAPL) investors intent on locking in their (now substantially reduced) gains is unsurprising. Apple's fundamentals, however, are now at such a level that the continued selling activity borders on madness. Apple has fallen, yes, but in a rational market can it really fall further?
As I write this Apple's share price is hovering at $445, giving the company a market cap of around $418 billion. With $41.7 billion in earnings over the last four quarters that would suggest a P/E of ˜10. A little low, perhaps, for a company with such a pedigree of innovation and disruption, but fair enough if you buy the narrative of "tech giant struggling against increased competition and the law of large numbers". But it's actually not right at all, because Apple also has $127 billion net equity, so the 'real' P/E is just under 7.
A P/E of 7 is already bearish, but while Apple might eventually enter a decline (anything's possible) even a diehard Apple skeptic would find it hard to construct an argument for an imminent collapse. It's certainly not in the numbers - last quarter the two biggest profit powerhouses, the iPhone and iPad lines, sold more than ever before.
Looking at the year ahead, it's clear that the market has not saturated and that, despite the increased competition, Apple is probably about to have its biggest year ever. In all likelihood, this time next year we'll see Apple equity at somewhere north of $170 billion... giving a 'real' P/E of only 5.9 at the current share price. While this is true of ANY stock with a P/E of 7 (by definition) I'd argue that Apple's 2013 earnings are 'in the bag' to such an extent that the forward equity adjusted P/E for 2014 is a much more useful number to consider. And 5.9, for this company, is a steal.
At the current rate, by 2020 Apple's market cap would be eclipsed by its pile of gold alone. How many incredibly popular, profitable, growing, premium brands can claim that? Losing market share is a scary phrase to hear, but it's exactly what you'd expect to happen to a segment pioneer that attracts imitators. Losing market share in a stable low growth sector (Automotive, for example). It should not be confused with losing market share in a high growth segment like smartphones/tables... and it certainly shouldn't be a mistake for a loss in profit generation within this segment!
The nature of Apple's product line means it is well hedged against inflation and currency fluctuation. With bank savings interest rates in the U.S. at a measly 1%, retail investors looking to get out of Apple should be asking themselves just how badly the company would need to screw up to make it a 'sell' at this price, and exactly where they'd rather put the money to use.
It makes sense to sell your Apple shares now, but only if you're looking to reinvest the funds as call options. I exited my position in Apple at $695... and at $455 I'm buying back with high leverage. The elusive $1Trillion market cap may be out of reach for 2013, but Apple remains an incredibly effective and profitable company that is now overtly oversold.
Disclosure: I am long AAPL.
Additional disclosure: I plan to increase my position in the next 48 hours.