Gold Is Not the Bubble - Apple Is

by: Tim Ayles

You can't turn the TV on anymore, it seems, and not hear about how Gold (NYSEARCA:GLD) is hitting new nominal highs which is sure to have a follow up question along the lines of: "Is the Gold Bubble Ready to Burst?"

Somehow, just because gold is hitting new nominal highs, and doing so in a recent straight up manner, we are in a bubble in bubblevision land. Never will the masses be right about the top in a bubble phase. In a bubble, everyone is happy to own the asset and can see nothing wrong with the investment no matter the price. Gold is due for a nasty retracement here, but a crash? I am not sure about that.

Which brings me to another investment I think IS in a bubble. I am betting the comments section of this article will be littered with venom for the reasons I am wrong.

When I look at pure numbers, I can't imagine the ability to make good money in Apple (NASDAQ:AAPL) long term at these prices. I have and still own AAPL, but am starting to think it's time to let some other greater fool take my shares.

To start, AAPL has a $285 billion market cap, yet only made $8.5 billion in free cash flow in 2008 and increased that to $9 billion in 2009. So far through the first 6 months of this year, AAPL is currently on pace to generate about $13 billion in free cash flow. This is a healthy 30% growth rate. No one can argue that the company is growing by leaps and bounds and making massive amounts of profits.

The problem though comes in with how much one is willing to pay for those profits today. Let's pretend for a moment that AAPL continues to grow its free cash flow 50% every two years as it has the past two. That would mean year end in 2012, their free cash flow would be $19.5 billion and in 2014, the free cash flow would stand at $29.25 billion.

Here is the kicker, if the stock did not go higher for the next 4 years, yet the company grew 50% in FCF every two years for the next 4, the business would be generating a 10% FCF 4 years from now. 10% is nothing to sneeze at I must admit. But there are plenty of mature businesses one can buy today who sell essential service products that people have to buy that yield 10% from a FCF stand point.

Here is one:

Kimberly-Clark (NYSE:KMB)

While diapers and toilet paper are not as sexy as the newest iPad, I would have to say that I use the products of one every day, and I don't own the product of the other or its competitors. One is a must have, the other is a luxury. I will let you judge which is which.

Currently the FCF yield on AAPL is a paltry 3.1%. The business is priced for continued hyper growth. Again, if the price got stuck here at a $285 billion market cap, the business would have to grow 50% every two years just to become as attractive as stodgy ole Kimberly-Clark from a free cash flow per dollar invested basis. If AAPL somehow began to stagnate in the face of all the competition from Google (NASDAQ:GOOG) and others, then every dollar invested today would only bring 3.1% FCF return at current prices, about 67% worse than KMB on a per invested dollar basis. Would you go and spend $500,000 on a local Subway Franchise if you knew the yearly income you would receive was $15,500? Buying AAPL at this price here is the same thing. Of course, you may be hoping that the sandwich shop you spent $500,000 on will turn into a $50,000 a year income in 4 years, but you would sure be relying on a lot of continued growth over long periods of time. Who wants to park their money for 4 years in hopes of making 10% in FCF yields 4 years from now, when there are other businesses paying that kind of FCF yield today?

Are investors hoping that the share price will continue to climb with the FCF increases for the next 4 years? Are they hoping the share price will rise to $675 per share (50% growth every 2 years) giving it a market cap of $641 billion in 4 years? Currently AAPL has a market cap about $11 billion more than:

Pfizer (NYSE:PFE)

The crazy part is this basket of businesses is currently producing a combined $24.4 billion in free cash flow based on year end 2009 numbers. Almost double AAPL.

To round out the case against AAPL, Barron's reported last month that of the major analysts following the stock, 47 have a "buy" rating on it, 3 have a "hold", and a grand total of ZERO say to sell it. Everyone must think it will make sense in a few years to add Microsoft (NASDAQ:MSFT) to my basket above to help balance out the future market cap of AAPL if it doubles in price. AAPL can do no wrong it seems and is worth every last cent in nearly everyone's mind. They better hope they are right, because AAPL makes up 20% of the Nasdaq 100 index (QQQQ).

Since 2003, AAPL's stock price has risen 3500% which would make the Nasdaq Index of the late 90's blush. Going back to our bubble comparison, although gold is in a ten year bull market, AAPL priced in gold instead of dollars is still up 1000%. the AAPL bubble has risen 1000% times faster than the gold bubble.

These types of valuations and priced for perfection gambling make me want to sell AAPL and use the proceeds to buy a little more gold.

Disclosure: Long GLD, SGOL, AAPL, AAPL puts, KMB, INTC, PFE