Like the Chinese economy, Apple has spiraled out of control for the past several years. The more innovative its products became, the more attention it received. However, like the Chinese economy, there has been no “cooling” to the excessive upward trend, and it appears the mighty AAPL is overheating.
The stock is currently trading in the upper $300s and appears to be highly overvalued, but its innovation has blinded the investor. If you left the symbol out and just told an investor that a stock had increased 420% + in the past five years, you would get a general consensus: Sell.
This trend cannot continue, no matter how innovative the company -- it’s just the laws of finance and simple economics. I believe a fair price for AAPL is $85, slightly higher than its book value. With a huge selloff, this stock could even go lower -- we have seen this panic before: Companies dropped to $0.40 in March 2009, and rebounded to $20.
What Makes AAPL Overvalued
- First and most important is the untimely demise of Steve Jobs. Mr. Jobs was the only reason Apple became the empire it is today. He is arguable the most influential person in the computer industry. I feel with his death, Apple's will only follow. Without leaders, empires crumble. Just like with Iraq, once Saddam Hussein was captured, Iraq was no longer united. With the tragic death of Steve Jobs, the Apple Empire will also falter, and I believe sooner than later. Jonathan Ive and Phil Shiller will never be able to take over the visionary and charismatic role of Steve Jobs.
- Most Apple products are price-sensitive; they do well with people who have relatively high income and cash levels. We are headed towards a double-dip recession, and when people have less income, price becomes a bigger factor. This will affect Apple products; consumers may choose Android over iPhone.
- The market is saturated with Apple products. Once everyone who wants an Apple product has one, the only way to generate new income is through product upgrades. Sales for Apple products are slowing, and this is a clear example of what happened with Microsoft (MSFT).
- Apple is the largest US corporation by market capitalization, and the law of large numbers means it cannot continue to grow at this blistering growth rate in the future (hence, the stock is overheated).
- Microsoft is not the only competition. It seems like every day Apple has a new competitor, the competition that is stacking up very well are the Google (GOOG) Android phones.
- There is skepticism about whether Apple can come up with a new revolutionary product after the iPad. It is its revolutionary products that have made the company a success, and now with its visionary gone, I don’t foresee any groundbreaking products coming out any time soon.
It is easy to run with the crowd when things are going good, but this bubble mentality has gotten investors in trouble far too many times. From the Dutch tulip bubble of 1637 to the dot-com bubble of 2000, we tend to cling on to momentum. Momentum is a great way to earn easy money, but only if you time it right.
Apple is a great company with wonderful products, but its run is up. It seems to me that innovation is beginning to run dry, and the stock price is overinflated. The stock has begun to fall already dropping from its $426 high. If the economy does not pick up and the company does not cushion its freefall, we could see new lows into 2012 -- maybe $85. Whatever the case, I see a rocky future and a new bubble about to burst. My recommendation: Sell.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.