The optimistic analysis of the prospects for Apple’s (AAPL) stock is a perfect illustration of what is wrong with most people’s approach to investing. According to Yahoo Finance, there are 50 analysts covering AAPL stock and offering earnings projections. This is five times as many analysts as those covering Statasys (SSYS) and Crucell (CRXL) combined, two stocks that performed as well or better than Apple in 2010. Given this intense scrutiny, the likelihood of an unknown piece of vital information about Apple that still remains to be factored into the stock price is infinitesimal.
The Efficient Market Theory
Looking for fallacies in this theory is the basis of my investment thesis, which, stated succinctly, is “Exploit the inefficiencies in the market created largely because everyone else is responding to the same small group of large company stocks like AAPL.”
An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
I agree that it is very difficult to beat the market by buying the same stocks the majority of market participants are following. For many money managers, the efficient market theory “works” since their goal is not to beat the markets but simply not to underperform the markets. If you have billions of dollars under management and making incredible amounts of money off front end and back end loads and the Management Expense Ratio, there isn’t much incentive to outperform. Especially considering the punishment for underperformance, when customers start looking at alternatives and redeeming investments. Given this dynamic, most large funds are disincentivized to do more than simply deliver market-similar performance. They only lose by underperforming.
Apple Headed to $1000/Share
I am hearing this a lot lately. Or, Apple will be the first company to achieve a trillion dollar market valuation. For the purpose of this article, these statements are virtually identical because at $1000/share the market value of AAPL is roughly $1 trillion. I am going to concede right now that this outcome is possible. Anything is possible, but is it likely? No.
The primary reason it is highly unlikely is that there has never been a $1 trillion company of any kind before, not even close. If you decide that the best investment you can make in the market is a bet on an event that has never happened before in the history of the world, then you are no longer making an investment, you are making a bet. A bet that Apple will be the first company in the world to achieve something never accomplished. Right now if I make that bet I will pay $320/share for the stock and if it works out favorably at some point in the future, I will receive $1000/share. That equates to roughly a 2.5 times return on my money or 5/2 odds.
Don’t you think I should get better odds on something never before accomplished? Given how heavily covered/analyzed the stock is, it is highly unlikely there is information available that is not currently priced into the stock. By making this “investment” you are saying you know something others do not. What’s more, many people seem to believe the stock is going much higher, so you are not alone in this position. That should concern any AAPL bull given that you need new money to propel the stock higher.
Cody Willard thinks the stock is headed for this magical mark, saying: "Apple’s Going to $1000 by 2015. Here’s Why."
But I bring this up because I think, if you don’t own it already Apple, you probably want to go ahead and establish your cost basis at these current levels. Because this stock is going higher. Much higher. Probably to at least $350 per share before year end. And Apple’s gonna hit $1000 before 2015. So wouldn’t you like to look back when it does and proudly tell people your own cost basis?
The stock’s still cheap, yes, even at $250 per share. And yes, even though it’s up from $7 just eight short years ago. That’s because of good ol’ fashioned earnings again. The stock’s only trading at 14 forward P/E multiple. And when you take into account all that cash, it’s only a 12 price to enterprise value multiple. This, for a company growing earnings 20-30% per year and positioned to keep doing so for a decade.
James Altucher thinks so too, saying: "Why Apple Will Be The First Company To Reach A Trillion Dollar Market Cap."
Assume iPad is going to sell 50 million iPads next year (I’ve seen estimates ranging from 43 million to 65 million). That’s at least four times as many iPads. Lets say they only grow two times per year for the two years after that (new models, more availability worldwide, etc). That’s 200 million iPads in 2013, or 15 to 20 times what they did in 2010. Two-hundred million iPads with a 30 percent margin (currently margins on iPads are about 36 percent, but I assume they will go down) is about $30 billion in gross profits.
One can go on and on with the metrics of how Apple blows it away but lets just say that in 2013, iPad and app sales represent about 40 percent of Apple’s gross profits. Total gross profits could be about $80 billion (today is $25 billion). Cash flow could be about 75 percent of that (like it is today), or about $60 billion. Slap a 20 times multiple on that and you have a market cap of $1.2 trillion. That’s a shareprice of about $1200 by 2013.
Those are pretty persuasive arguments presented with nice financial projections that all wrap this up pretty tight as a no brainer investment. To be completely honest, I hope they are right. I like when people make money, it’s great for the market and great for the economy and great for an environment of general prosperity, which is great for me. It’s just not a ‘bet’ I am willing to make. I don’t think making bets on unique events is a good investment strategy. The uniqueness of the event defines its unlikely outcome, which in itself should make you scratch your head about whether that is the foundation of a strong investment thesis.
Many smaller companies double and triple every year. Without reaching the size and scale that push against the confines of a finite economy, growth is much easier to come by. There is always a first time, financial or otherwise and AAPL may just be the first $1 trillion company. We can celebrate with a CNBC countdown and bask in the excess, but betting on firsts is not investing in the humble opinions of this analyst. While others pound their chests with pride in pursuit of the never before accomplished, I will stick to making money the old fashioned way, looking where others have yet to dwell and exploiting the inefficiencies of the markets created when the majority of market participants are focused on a few large stocks like AAPL.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.