Apple Hits Another All-Time High: Does It Matter?

Sep. 3.14 | About: Apple Inc. (AAPL)

Summary

Apple hits an all-time high. Is this a reason not to invest?

Why Apple can not grow continuously 50% year over year.

Why Apple will never become a banana.

The last few months Apple (NASDAQ:AAPL) bulls and bears have come out of hiding once again…

Source: Wiki

The bears are suggesting a potential loss in market share with the iPhone, a conceivable disappointment with the iWatch and further address a broad scale of other reasons why Apple is heavily overvalued.

The bulls on the other hand are pointing towards new innovative products (iWatch) whilst emphasizing that Apple is maintaining profitable margins and more importantly, they offer fundamental valuation assessments which outline the arguments why Apple is still undervalued.

Summarized

  1. There are plenty of reasons for investors to consider Apple cheap
  2. There are plenty of reasons for investors to consider Apple expensive

The one question being ignored is the following: "Does it matter if Apple reaches an all-time high?"

This article adds as extension to anyone who believes Apple is overvalued or undervalued. This as both camps (bulls & bears) use this argument "all-time high" to make their case more credible. This is a case about statistics. With this article I try to set the record straight…

Numerous investors have hit themselves for missing out on Apple. Why didn't I buy it last year? The more relevant question: were these investors right not to invest in Apple when it hit another all-time high?

Source: Wallstreet Daily

AAPL Chart

AAPL data by YCharts

Since 12/12/1980 Apple touched an all-time high 326 times. Investors might have asked themselves the same question 326 times: "is this the top?"

Source: Data Yahoo Finance

What happens to the share price after Apple hit an all-time high?

Table: Returns Apple after hitting all-time high

Period

Week 1

2 Weeks

4 Weeks

12 weeks

6 Months

1 Year

MIN

-19.84%

-21.93%

-42.54%

-51%

-67%

-76%

MAX

21.74%

15.07%

31.69%

56%

85%

112%

AVG

0.61%

0.78%

2.14%

4.13%

10.11%

13.66%

Click to enlarge

Source: Data Yahoo Finance + spreadsheet

On average, exactly 1 week after Apple hit its all-time high the share price is 0.61% higher. Worst case scenario after exactly 1 week is where the investor lost 20%, whilst in the best scenario he gained 20%. Although minimum and maximum scenarios appear to be each other's opposite partner, the relationship amid the 2 factors does give the impression that there is a positive connection between return and amount of weeks after an all-time high. This link can be seen in the graph underneath.

Source: Data Yahoo Finance

Should you refrain from investing after Apple hit an all-time high? Data suggests you should not.

The statistics of growth

Countless valuation assessments nowadays suggest double digit growth as moderately normal. The question should be: "is it normal?" Is it statistically reasonable, or better to say "fair" to expect double digit growth year after year?

Let's look at the history of Net Sales of Apple.

Source: Annual Reports Apple

Since 1990 Apple has an increased net sale of 19% per annum on average. The maximum growth entitled to 66%, whilst the minimum year yielded -32%

(All numbers in *1000)

Purely looking at growth number per year you find no exact relationship whatsoever. Apple was only capable of beating improved numbers 4 years in a row. The actual economics of business cycles gets all fuzzy when a bull or bear market enters. Let alone when a different revenue line is being introduced.

The statement: "year after year expanding growth" is somewhat statistically implausible and should be a red flag to any investor reading a quarterly/annual report or listening in to a conference call.

Let's have a look again at the share price of Apple over the last 4 years.

Source: Yahoo Finance Data

After years of expanding growth in Net Sales, 32% (2010), 55% (2011) and even 66% (2012), the sky seemed the limit. Eventually, rationality caught up with Apple's Net Sales growth and the number declined. Simultaneously, Apple's share price was nearly cut in half! Doomsday articles entered on the horizon, "The end of Apple…/Marketshare will be lost forever" etc. Really, irrational exuberance is a wonderful thing.

What if Net Sales would have grown at a pace of at least 66% a year?

Net Sales Apple: 2 scenarios

Source: Yahoo Finance Data

With a constant growth rate of 66% a year in 2021, the Net Sales of Apple would yield $9,854,445,194,000. Using a more plausible growth rate of 19% the Net Sales would yield $687,294,970,000. That's 687 billion dollars. The difference after 8 years would be a staggering 9167 billion dollars. That's only after 8 years! It's beyond me why more than a few financial analysts are still valuing shares with expected expanding double digit growth for years to come. A simplistic example shows the implausibility of such an occurrence. This often results in disappointment and therefore a slash in share price no matter whether the stock is a good investment or not. But if you as an Apple investor believe in its underlining story and you know the previous year was amazing but Apple shows a disappointing growth rate for the current year... consider it a good buying opportunity!

Now let's have a look at Net Income figures of Apple.

Net Income Apple

Source: Annual Reports Apple

There seems no specific relationship between growth rates in Net Income over the years. The average growth per year is 50%. Looking for some relation in this is of course keeping the financial analysts at work, they need something to write about.

What about quarterly reports? I care more for trends on an annual basis than on a quarterly basis. I am aware of quarterly business cycles, but I consider annual trends far more important as I tend to keep my investments longer than 1 year. My point is all about irrational exuberance in regards of growth rates, not movements in cyclical quarters.

Scenario Net Income (growth 50%) VS Net Sales (growth 19%)

Net Income VS Net Sales

Source: Annual Reports Apple

If Net Income would increase like it did on average by 50% per year, the table above depicts the potential situation. By maintaining the average growth in place for Net Sales one can see that the comparison between Net Sales and Net Income eventually goes blank as the ratio income/sales exceed a 100% which is practically impossible. Therefore, an analyst should always refer to what the expected normal growth rate for a juggernaut like Apple should be and not what it could be. What is rationally plausible, because as we all know money impairs judgment.

One way of doing so is by taking a look at the historical ratio Net Income/Net Sales.

Net Income/Net Sales

Source: Annual Reports Apple

This ratio clarifies a realistic association between income/sales and can signal what is to be expected in the future. The ratio has been fluctuating between 10 and 30% for the last 10 years.

Conclusion

Is it a problem when Apple hits an all-time high? Technically it does not matter, only a black swan event worse than anything that has ever happened to Apple in 35 years might drive your returns into a cliff. Other than that, buying in on an all-time high is as worthy as any other moment to buy Apple. The conclusion here is that an all-time high of Apple should not scare any investor away. Obviously, there might be better positions to enter, but an all-time high does not have to be a reason to postpone investment. Timing your investment doesn't have to be difficult.

Be realistic when forecasting growth numbers of net sales & net income. Expanding double digit growth is not economically sustainable. It only leaves the seasoned investor with enough opportunities to buy in cheap, as a majority of investors might dump the stock due to lack of insight into statistical knowledge as they basically act like a herd of sheep on the company posting a decline in growth.

When observing income or revenue growth, realize they are not the same. One could hope for a 40% income growth while only seeing a marginal growth in revenue, but this person knows from a statistical point that this is not lasting and sooner or later a news article might pop up with a profit warning dropping the share down. It happens over and over again and as said before it gives a great opportunity to whoever wants to buy Apple in a dip.

And therefore, if you believe in the fundamentals of Apple and see the share price of Apple hit another all-time high, don't be scared. Apple is still Apple and it didn't turn into a banana.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.