The Apple Obsession And The Facebook IPO

| About: Apple Inc. (AAPL)

Seeking Alpha readers obsess over Apple (NASDAQ:AAPL) and perhaps rightly so.

Writing about Apple here is, in fact, the easiest dollar one can make. So easy that the editors recently restricted us all to three Apple stories per month. It's like regulating an oil well's flow so it won't play out prematurely.

So as the Facebook (NASDAQ:FB) IPO approaches let's talk about the Apple obsession.

Part of it is a simple disconnect between expected and actual valuation caused by the law of large numbers. At its current price of $553/share, AAPL trades at a PE multiple of just 13.5. That's well below the S&P's average PE of 17, far below 18.5, and nothing next to Amazon's (NASDAQ:AMZN) "redonkulous" PE of 184.

Unfair, say Apple fanboys.

But consider this. Apple had $108 billion in revenue last year. It brought almost a quarter of that to the bottom line. Like athletes, stocks aren't valued based on what you've done for me. They're based on what you'll do for me going forward.

What can Apple do for me going forward? As numbers get bigger they get harder to grow. For Apple to maintain its current earnings pace, it would have to bring in over $200 billion and earn $50 billion in 2013. That's bigger, in terms of sales, than GM. Maintain that momentum for even four years and you're Wal-Mart (NYSE:WMT).

Will Apple do that? And maintain its profitability? Maybe, but I doubt it, because there are limits on the potential size of the smartphone market, even the tablet market. Once we're all in, it's strictly a replacement market, and you have to then depend on sales of apps and software for growth, which don't deliver the numbers.

Amazon is less than half of Apple's size, and while it deliberately keeps its profit margins super-low - even on digital goods - markets expect that going forward it can accelerate earnings for many years, given its tight control over customers. Going forward the market expects just as much revenue growth as Apple has been getting, but much faster acceleration on earnings. And future earnings are what you're buying when you buy stock.

Facebook's (FB) revenue and earnings profile is said to be closer to that of Amazon than that of Apple. The question investors need to ask is whether those earnings can be accelerated, at what rate, and how big Facebook must get in order to bring in those earnings. My view is that Facebook is more mature than Amazon, more like Apple, and that in six months those who buy the IPO will find themselves well underwater.

Part of the Apple obsession involves writing that the company is woefully undervalued, that it should be seen more like Facebook, or at least Google than those competitors. But markets aren't fair, and neither are valuations. They're a continuous auction, based on what might happen over the next quarter or year.

The market says Apple is worth 13.5 times its last 12 months' earnings. That's its value. Arguing over that, obsessing over that, believing that Apple should have a PE of 15 or 20, won't create it. Its valuation will rise or fall based on perceptions of those earnings, but the current PE isn't that different from what it was a year ago, when the price was under $400.

I keep Apple shares as a proxy for the market as a whole. I agree that to not own Apple is to basically short the stock. But I'm not depending on it to make me a millionaire. You should not obsess over it either.

Disclosure: I am long AAPL, AMZN.