After the nearly 30% rise since late August and the "house money" syndrome in full effect due to my purchase of the stock in January of 2009 at $82.46, I decided to finally take my profits in Apple. This is not to say that I think Apple has peaked at $309.23 per share (my selling price today) - I realize it is very unlikely that I will ever sell at the exact peak and do not expect that I will have the ability to do so. Additionally, as many of you are well aware, Apple clearly has yet another winner on its hands with the iPad, iPhone sales continue to remain strong, and growth in Mac volumes is robust. So long as Apple continues to beat the quarterly earnings estimates and generate solid unit sales volumes (as it has in each quarter since at least Q1 2005), it is reasonable to expect the stock to continue to rise.
However, I believe the upside is limited for Apple, and I would be better off allocating my time towards learning about another company trading at valuations with a more favorable margin of safety and a higher ceiling for upside price appreciation.
Challenges for Apple- Half a Trillion Dollars?
Apple is now a nearly $300 billion market cap company. The important questions that I have for an entity that must constantly update its product offerings due to its reliance the rapidly changing preferences of consumers for electronic devices are can it:
- Continue to grow at the same historical pace over the next 3+ years? ... or, in other words, can Apple continue to develop new products for different segments of the market that generate sales growth as successfully as its other products have in the past, and will this growth be enough to offset possible declines in its existing product offering at the time each new product is introduced? (note the 11% decline in iPod sales reported during its most recent quarter).
- Maintain its sales volumes and profit margins generated by its existing product offerings over the long term (5+ years)?...or, in other words, can Apple continue to fend off rapidly improving competition (Droid) and create the demand needed to support the prices of their premium products?
- Increase in value by another 50% or more over the next 12-24 months?... or, in other words, can Apple’s stock really have a market cap of nearly half a trillion dollars? I can't help but ask myself, “Can a consumer electronics company really be worth more Exxon Mobil ($338 Billion Market Cap)?”
Growth Doesn't Continue Forever
These concerns are not mentioned to discredit the accomplishments of Apple and its management team in any manner whatsoever, or to imply that I believe they are incompetent or incapable of producing satisfactory financial performance. They are to be applauded for the proven track record of successfully developing and introducing products in a rapidly changing market- the key challenge management teams at technology companies face. The 3,200%+ increase in the company’s stock from $9.30 or so in October of 2001 (when the first iPod was released) until to now reflects their accomplishments.
However, no matter how talented the management team, the fact is that all companies cannot continue to grow profits at the pace Apple has in perpetuity. In other words, Apple's growth rate will slow at some point in time. Is that point now now? Probably not (again, the iPad is clearly a winner). When will it stop? Your guess is as good as anyone else’s'. The fact is, nobody knows with 100% certainty when it will slow, but I'm very confident it will at some point and I see no need to wait until that time is realized. Today, I literally put my money where my mouth is.
Until growth actually slows, everyone will continue to guess when the point will be, and (whether they actually model or project future sales and profitability, or by blindly rationalizing their purchase by saying to themselves "it will go up!") everyone will continue to try to estimate a terminal value for the company at that estimated point in time. But, like all growth stocks that stop growing, when earnings growth slows (IE: when that point is reached), the stock price will fall and will fall significantly (10-20%+ in 1-3 months is very likely).
Guidance for Recent Purchasers of the Stock
For those of you who recently bought Apple's stock, feel free to hold on to the stock so long as it continues to beat quarterly earnings estimates. I would love to do this, but I feel as if doing so would be greedy on my part. Like I said earlier, I'm not saying $309 is the peak, the company clearly has a winner on its hands with the iPad, and the stock will continue to rise as long as it beats earnings and sales volumes estimates. However, like all growth stocks, the first time it misses earnings, get out and get out fast. Remember how many people loved RIMM from 2003 to 2008? Look at that stock's performance after June 2008 when it first missed earnings estimates, and also since March 2010 when it again missed estimates. I think the charts tell the story.
Disclosure: Sold Apple. Do not have any position on RIMM or XOM. No other conflicts of interest exist.