Remember the movie "The Boy in the Plastic Bubble"? If you can, watch the movie first as you will get a better perspective on where this article is coming from.
As Apple reached a new all time high in excess of $600/share after announcing that it will finally pay a dividend and buy back shares, I could not help but notice the proliferation of articles alluding to Apple (AAPL) reaching "bubble" proportions. Here is a sampling:
From the Wall Street Journal (via Market Currents at SA): Those excited about Apple's dividend might want to cast their minds back to what happened to Microsoft (MSFT) when it bowed to pressure and started payouts in early 2003. "Microsoft within two years quickly moved from a growth company to a boring, fuddy-duddy, income-producing company," says Villere partner George Young.
Here is an older one:
From Motley Fool: That's nice, but is Apple a bubble today?
So I'm biased. I'd love to say my analysis was correct -- that Apple was overvalued at $180 a share, and that Apple at $300 a share is a bubble. It certainly feels like a bubble.
No wonder why SA wouldn't take me seriously (I can't say that I blame them!) when I sarcastically wrote "Why Apple will never be a $600 stock!" in July 2011 (when Apple was at $393) wherein I wrote:
AAPL will most likely always get no respect. Unlike Exxon with a business that is easy to understand; the perception will always still be..."how much more can it grow at this rate?" or "it can't be..."!
Before we go over the "bubble" thesis with regards to Apple, let me make it very clear that there isn't a single stock that will go up in a straight line forever. Stocks will consolidate, trend sideways or even hit extreme oversold levels over time. Great stocks, however, will almost always bounce back and continue its dominant trend.
How do we define what is a financial "bubble"? Search the net and you will find variances on what constitutes a financial bubble. For the purposes of this article, I'll use the explanation taken from Wikipedia:
The term "bubble", in reference to financial crises, originated in the 1711-1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in the Dutch tulip mania. The metaphor indicated that the prices of the stock were inflated and fragile - expanded based on nothing but air, and vulnerable to a sudden burst, as in fact occurred.
For the sake of clarity, we need to establish and agree that for an asset to be defined as being a "bubble", it needs to have these characteristics:
- An inflated stock price that is detached from reality. This is often related to the "Greater Fool Theory" wherein optimistic participants (fools) buy overvalued assets in the hopes that a greater fool buys it from them at a higher price. The challenge is, how does one define "overvaluation"? Tulip Mania (when a single tulip cost about 10x a craftsman's annual wage) or stocks trading at over 100x PE with no earnings during the dot.com mania comes to mind.
- Financial "Bubbles", as history would show, usually spreads its "overvaluation" to other securities within the sector. Remember how the "dot.com" boom spread towards the optical sector (JD Uniphase, Nortel, Global Crossing, etc...)? If you remembered the Japanese bubble 1986, you will note how it impacted the Real Estate prices in Hawaii.
- "Bubble" stocks usually do not recover - they either get delisted or get bought out cheap (remember AOL?).
- "Bubble" stocks usually cannot maintain and support its valuation trajectory as they are usually supported with the help of some "financial engineering".
Does Apple have an "inflated" stock price that is detached from reality? Here are some recent metrics taken from FinViz.com:
click to enlarge
I have intentionally picked companies with popular brands that you can relate to. Given that there isn't a single empirical "universal" parameter that can define "undervaluation" or "overvaluation", we can logically surmise that these measurements are therefore subjective at best.
Based on the common valuation ratios above, I need to find someone sane to logically explain to me how Apple is "inflated and detached from reality". Sort it using Trailing or Forward PE or any of the other metrics; how does Apple compare?
IF it is inflated, based on the metrics above, what does it say about the rest of the companies? Would Walmart (WMT) be less of a bubble at 12.5x FPE compared to Apple's 13.9x FPE? Look at Chipotle Mexican Grill (CMG) or Salesforce (CMR); revenues on both companies are less than Apple's but yet they trade at least 2x Apple's multiple. Strangely enough, no one whines about it.
One can argue that the "market" is inflated and therefore...every stock must be inflated as well. If your portfolio have done well "shorting" these inflated companies over the past 6 months; you must be doing something great. If you haven't done well; has your mindset prevented you from taking action?
Remember these brilliant minds? From Yahoo Finance's Breakout:
And just as the S&P 500 hits its highest point since May 2008, now within 10% of its record close of 1,565 from October 2007, the thundering herd of belated bulls is finally showing up to the bash.
What do "bubbles" look like?
At what stage do you think Apple (the stock) is right now? One thing for sure, it is not in the "Stealth" or "Blow Off" phase. I would surmise that 80% of the SA community will peg it in the middle two. Consider the following observations:
- Chose any valuation metrics within the Technology Industry (or even the broad market) and you will find that Apple isn't trading with an "inflated" valuation. Remember Nortel (NT)? How about Amazon (AMZN) or SalesForce.com (CRM) today? As far as I can remember, both names have always traded at a premium against its historical earnings growth rate.
- The talking heads are still in denial about Apple. Look at the SA site itself and see how many authors have suddenly come out of the woodwork calling for Apple's demise! Why is that?
- When did analysts come around in recognizing the growth story behind the company? Last time I checked, independent bloggers still outperformed Institutional analysts by a wide margin! I don't recall anyone pounding the table and calling it a strong buy a year ago.
- The majority of us are still occupied with being worried about the European debt crisis (Spain to follow?) or the upcoming slowdown in China.
- Did the market anticipate the impact of the iPhone or the iPad?
- What is the current Mac market share? While PC growth has stagnated over the past few years, guess who has been growing consistently?
- Remember those big and heavy textbooks you used to carry in your backpack when you were going to college? Your kids will have those loaded in an iPad one day.
- What will happen to iTunes when it grows up and controls every newly released media?
- Remember Siri? As soon as it displaces Google for search, can you say hello to Apple's own Ad revenues?
I could go on and on...but I'd just be "jumping the shark"! Remember when I said:
Like the iPhone, an iPad2 may be available at a price level between the Kindle Fire and the lowest priced iPad3 (with 32GB?) or the $199 to $399 sweet spot. What better way to push the rest to compete at the sub $199 market?
Lucky call? According to the New York Times, Google (GOOG) recently announced that it was going to launch its own $150 tablet. Assuming that this transpires as reported, the tablet market will now have 3 price points: (1) the sub $199 (Kindle and the new Google tablet), (2) the mid $299 (TBD if RIMM can own that spot), and (3) the high end (iPad).
Who is living in a "bubble"? Is the glass half full or half empty? Given Apple's torrid run this year; it is bound to retrace. However, to allude that it is a bubble is really jumping the shark. If you missed the bus; don't worry, another one will come by (i.e. Apple will retrace).
If you've been on the bus with me since last year (or since my first Apple article this year), our stop remains at $587 to sell 50% for a healthy profit. My screens are currently showing more short/sell candidates; be safe out there. Of course, your mileage may vary.
Look at it this way: if Apple was to split its shares and was trading at $60; would your perception change? I would think that people will not stop calling it a "bubble" because: (1) it is now bigger than Exxon (XOM) in terms of market cap, (2) no other mega cap has ever achieved the consistent financial success Apple has, and (3) it has gained at least 40% YTD and they missed the run.
In the movie The Boy in the Plastic Bubble, John Travolta had to "fall in love" to give him the clarity to see things in a different manner. What will it take for investors to see things in a different manner if they've missed the Apple train?
Disclosure: I am long AAPL.