How did Apple's (AAPL) market cap drop from $656 billion to $446 billion in less than five months? Is the company really worth $200 billion less now than it was on September 19th? Were $200 billion worth of Apple assets destroyed in some sort of unseen natural disaster? Highly unlikely. Then what happened? Many attribute it to the iPhone 5, which has been called an evolution rather than a revolution. This could be, but is the price tag of innovation really $200 billion? Is innovation at Apple no more? Or is there still hope for this company that just last year made Exxon Mobil's (XOM) market cap look like Monopoly money? Will Apple ever again have a market share of more than $600 billion? These many questions comprise the $200 billion question. This article will look at three things: where the money went, why it went there, and if it will come back.
Where did the money go?
Money doesn't just disappear, it simply changes hands. When you go out to eat you spend money, meaning you have less, but also meaning the restaurant has more. The same principle is true with money invested in stock. Someone who sells a share of stock receives money in return. Most people invest in stock to see a return on their money that would be greater than if they put it in the bank. Therefore, most people who sell one share of a stock will invest it in the stock of another company which they deem to have higher returns than the one they just sold. Assuming this is true, the market capitalization of other stocks, especially Apple's competitors, should be rising rather rapidly-and a few of them are. Looking at the table below, we can see that four of Apple's major competitors-Samsung (SSNLF.PK), Nokia (NOK), BlackBerry (BBRY), and Google (GOOG) - have increased their market capitalization by a total of $63.5 billion from the time the iPhone 5 was released on September 21st. [A note on the chart below: Samsung's stock price was converted from South Korean Won (KRW) to United States Dollars ((USD)) using the conversion rate from February 7th of .000917 KRW to 1 USD. Of course it is not possible to invest in Samsung directly as it is not traded on exchanges in the United States, but there are still indirect ways for investors to put their money in Samsung.]
These increases in market capitalization are, of course, due to various factors within the companies themselves, including new product announcements, earnings reports, and general news events. But the point is that the money had to come from somewhere, and logically, seeing as all four of these companies compete with Apple in one form or another, it might have come from investors selling their Apple stock and purchasing stock in these companies. The remaining $140 billion is probably invested in various stocks or in bank accounts held by investors who are waiting for Apple's stock to begin its ascent once more.
Why did it go there?
Now that we have looked at where the $200 billion went, we will take some time to look at why it went there. As already mentioned, many blame it on the iPhone 5, which makes sense as its release date marked the beginning of the long downtrend in Apple's price. But why was the iPhone 5 such a disaster? Many say that it was not "new" enough, that it was basically the same as the iPhone 4S but with a bigger screen. As asked earlier, is Apple being less innovative than before worth $200 billion? Probably not, but if you combine that with increasing competition and worry over Apple's direction after Steve Jobs' passing, you might have a figure pretty close to that $200 billion. From the image below we can see that iPhone sales and Apple's sales overall have been increasing rather rapidly. However, for the most recent year, iPhone sales made up a slightly smaller percentage of total sales. This was a big concern for investors because of the timing. In May of 2012, Samsung released the Galaxy S III smartphone, which it would advertise as being a much better choice than the iPhone 5. Because of this, investors believed that Apple's days of being the leading smart phone manufacturer were over and subsequently began selling their stock. The reason some gave for Apple losing market share to Samsung was that Steve Jobs was no longer around to come up with brilliant new ideas and drive the company forward.
Another potential reason Apple's market capitalization has been suffering is the $45 billion plan, announced in March of 2012, to give money back to investors in the form of dividends and share repurchasing. Some, perhaps, took this as a sign that Apple CEO Tim Cook believed the company's growth phase was coming to an end, and to attract investors it would have to create value for them in other ways. Needless to say, those who had this fear felt that it was confirmed when Verizon (VZ) announced that only half of all the iPhones it had sold in Q4 2012 were the iPhone 5.
The last and possibly the biggest reason that Apple continues to lose market capitalization is the earnings it reported for Q1 2013. On January 23rd, Apple reported revenue of $54.5 billion, an eighteen percent increase over the same quarter the previous year. Unfortunately for Apple, investors don't care about revenue as much as they care about income. Apple reported earnings per share of $13.81, $0.06 below Q1 2012 earnings of $13.87 per share. This was due to an increase of 5.6 million outstanding shares compared to the increase in profit of only $14 million. The drop in earnings per share caused Apple's stock price to drop by $65 to close the day at $450, with a market cap of $422.6 billion.
Will it come back?
Now for the most important part of our analysis - will the $200 billion return to Apple. Those who have already attempted to answer this question have mixed opinions. Some believe that Apple should be a $200 stock, thus giving it a market capitalization of only $187.8 billion. This seems a little extreme as currently Apple's assets alone are worth just over $196 billion. On the other extreme we have Topeka Capital analyst Brian White saying that Apple will be the first company to reach a market capitalization of $1 Trillion. He projects that the stock will be trading at $880 by this time next year, giving it a market capitalization of $826.4 billion. The analyst consensus on the NASDAQ website is that by this time next year, Apple stock will be trading at $650, giving it a market capitalization of $610.4 billion, not quite at its previous $656 billion, but still pretty close.
Let's look at the company's current state. Apple closed at $474.98 on Friday, February 8th. This gives it a price-earnings of 10.77, well below its September high of 16.50. Its forward price-earnings, based on earnings estimates for the next twelve months of $44.72, is 10.62. Currently the stock is paying a dividend of $10.60 per year, giving it a yield of 2.23%, just above the S&P 500 average of 2.07%. There are currently 939.06 million shares outstanding, giving it a market capitalization of $446 billion. Earnings per share for the trailing twelve months totaled $44.10, up from $35.11 the year before. That's an increase of 25.61% year over year.
Next we can look at its balance sheet, which has been an area of dispute among investors as of late. Total assets for Q1 2013 have increased to more than $196 billion from $139 billion in Q1 2012, a 41% increase. Most of this increase was from cash and cash equivalents, short-term securities, and long-term securities, meaning that Apple has a lot of retained earnings to put to use. Recently, David Einhorn of Greenlight Capital filed suit against Apple, alleging that it was not using its cash in the best interest of investors. Einhorn is attempting to block a proposed amendment to the company's charter that would put the power to issue preferred stock into the hands of shareholders rather than the board of directors. Einhorn said that he suggested to Apple in September that they offer preferred stock as an option to investors. He said this suggestion was rejected outright by Apple shortly after. Apple issued a statement Thursday to address Einhorn's concerns, stating that they "Remain committed to having an ongoing dialogue with our shareholders to get perspectives around return of capital and driving shareholder value." Another notable increase in the balance sheet came from property, plant, and equipment which grew from $7.8 billion a year ago to $15.4 billion in the most recent quarter. Clearly Apple is still growing pretty fast.
Looking at Apple's decrease in margins can be rather frightening if you don't know the reason behind it, which has already been mentioned. Half of the smartphones Apple sold in the last quarter were iPhone 5s, the other half was split between the 4 and the 4S. Because Apple has released the iPhone 5, the price for the iPhone 4 and the iPhone 4S has gone down by $200 and $100 respectively. Because of this drop in price, many consumers are choosing to save money by getting an older version. Both AT&T (T) and Verizon announced that the majority of their smartphone sales for Q4 2012 were iPhones. AT&T said it had sold 10.2 million smartphones, 8.6 million of which were iPhones, for a total of 84%, while Verizon said that it sold 9.8 million smartphones, 6.2 million of which were iPhones for a total of 63%. Overall, smartphones running the Android operating system still control the greatest market share with 53.4%, but according to the figures released from AT&T and Verizon, as well as the chart shown below, Apple is increasing its lead quickly, while Google is gaining a lot less ground than it was last year. Regardless of what version of the iPhone they are selling, they are still selling a lot more than the competition.
Another promising sign that innovation at Apple is not dead is the recent job posting for a Siri Software Engineer. The way the job posting is worded has people wondering if the company is currently working on making Siri compatible with OS X, Apple's personal computer operating system. If this is the case, it means Apple already has plans for how to revolutionize the computer industry yet again.
Then, of course, we have all the new product rumors. Everyone knows the rumors about Apple TV, but in December 2012, CEO Tim Cook stated that the TV set was "an area of intense interest." Apple does already have something called the Apple TV, but it has not gone over as well as most of Apple's other devices. If Tim Cook seriously decides to get behind the Apple TV, it could certainly become as big as devices like the iPad or even the iPhone. Less known rumors have been circulating for a little while about the iWatch and the iGlasses, and then there's speculation about when the iPhone 5S and the iPhone 6 will be released. The point that I am trying to make here is that innovation at Apple is clearly not dead. The idea is the hard part, and Apple has proven it has plenty of ideas.
Apple has also been picking up on the contracts that companies like BlackBerry have been losing. Just this month, Home Depot (HD), the fifth largest retailer in the world, announced that it would be converting its ten thousand person management team from the BlackBerry to the iPhone. Last year, U.S. Immigrations and Customs Enforcement, the National Transportation Safety Board, and Australia's Treasury Department all reported that they would be leaving the BlackBerry in favor of the iPhone. iPads are also heavily used by government officials, including the Air Force.
In summary, the $225 drop in Apple's stock price and the $200 billion dollar drop in its market capitalization should definitely be looked at as temporary. It fell based on concerns about Apple's future that were over exaggerated to the extreme. This company still clearly has everything it needs to succeed - ideas, employees, customers, property, and a huge pile of money. With a price earnings of 10.77, compared to Google's 24.30, Apple's price has plenty of room to rise. Supported by all the evidence I have just given, I would say that Apple's stock will have gained its former status of $656 billion in market capitalization by the end of 2014. Maybe by then we'll all be driving iCars.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.