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Is Apple Making A Comeback? A Historical Perspective

Aug. 07, 2013 2:44 PM ETApple Inc. (AAPL)58 Comments
I Know First Research profile picture
I Know First Research

Bubbles are notoriously hard to predict and many neo-classical economists even deny their existence. There are some notable bubbles such as the Nikkei bubble in the 80s, the dotcom bubble in the late 90s, and the American real estate bubble leading to the recent Great Recession. Now the question being asked is whether Apple's spectacular rise (NASDAQ:AAPL), which began in the second quarter of 2009, was also a bubble. Can Apple's boom and bust be compared to those of Microsoft (MSFT), Cisco (CSCO), Intel (INTC) , and other tech companies during the dotcom bubble? When the general economy was just exiting the recession and experiencing sluggish growth, Apple's stock began to take off. Was this spectacular growth a bubble, the result of strong fundamentals, or a combination of both? What made Apple unique during the past decade, allowing it to defy market trends and generate so much interest?

Apple's Incredible Success

Apple began to take off after the Great Recession ended in mid-2009. Many experts attributed Apple's growth to strong fundamentals such as smart pricing and marketing, rising revenue, the promising future of new technologies such as the iPad, and rising international demand for computers and smartphones. In 2011 Apple overtook Exxon Mobile (XOM) to become the world's most valuable company in terms of market capitalization; and in 2012 it overtook Microsoft to become the most valuable company in history. At the time there were many experts who argued that Apple was still undervalued and predicted that the stock would continue to increase all the way up to a $1000 valuation. Although there were other experts who suggested that Apple was reaching its peak, these analysts were in the minority and were given little voice.

Was Apple's 21st Century Rise a Bubble?

It is hard to determine whether or not

This article was written by

I Know First Research profile picture
I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. Co-Founder Dr. Lipa Roitman, a scientist, with over 20 years of experience created the market prediction system. The algorithm is based on artificial intelligence, machine learning and incorporates elements of artificial neural networks as well as genetic algorithms to model and predict the flow of money between 10,000 markets from 3-days to a year: stocks, ETF's, world indices, gold, currencies, interest rates, and commodities. The algorithm outputs a predicted trend as a number, which in turn, is used by traders to identify when to enter and exit the market. While forecasts can be used for intra-day trading, the predictability tends to become stronger over longer time-horizons such as the 1-month, 3-month and 1-year forecasts. Visit us at iknowfirst.com

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Comments (58)

Your article is interesting for the methodology.
It appears to treat as data the elements of stock performance over time, with a self-correcting algorithm to analyse this data. So the algorithm is essentially focusing on the outcomes of investor psychology and behaviour (i.e.. the actual stock performance). Conclusions about what drives psychology and behaviour are not implicit in the algorithm itself, but must be inferred, i.e. judgements must be made. Assuming there are cycles to this behaviour, and such cycles are repetitive, then the algorithm may reflect something about human behaviour.
Whether this is useful to an investor is a moot point.
Your article recognises this in the plea for Apple to produce more products. As you also point out, this is unrelated to psychological and behavioural reactions to the new products produced. So the performance of Apple in the market place, and the performance of the stock price are essentially unrelated.
The performance of Apple in the market place is as much a function of its overall ecosystem, as it is of individual products/hardware. I think you'd agree that the stock price does not factor in Apple's ecosystem as a product in its own right - I'd argue that this IS Apple's product. So the algorithm may be a beautiful thing, and of interest in tracking the chaotic behaviour of human beings, but how does it help us? Interested in your comments.
Tack profile picture
I am not an investor in Apple stock and have no dog in this fight, but I do read the various articles just for interest.

I don't need technical charts or P/E ratios to determine my outlook for Apple. I just observe what's happened/happening in the market place. Since, Steve Jobs' passing, almost two years ago, Apple has introduced not a single significant improvement or major new device to its product line. During that same period Google (Android & devices) and Samsung (devices) have run rings around Apple, now taking the overall volume sales positions from Apple in both phones and tablets. The latest offerings not only offer better specs and features, they are available at significant discounts to Apple's tired offerings.

Samsung, in particular, has not made the typical kinds of value judgments that Apple routinely tries to impose on its user base, deciding for them what size, features or apps they should use. No, Samsung just pumps out products in a withering variety sizes, all priced to be the leaders in their segments, and they are. It used to be that Apple could boast better technology or quality, but those days are in the distant past.

Unless Apple rolls up its sleeves and gets very aggressive trying to compete on both specs and price, and with rapidity in its actions, rather than trying to defend a rapidly-shrinking low-volume, high-price niche, their future looks highly questionable, no matter how much cash they might have sitting by idly. It's not clear at all, at least to me, that they're up to the task with the existing management team.
Ray Merola profile picture
It's hard for me to buy the argument that AAPL stock was in a bubble when the ttm P/E was about 14x at its apex; without considering the $100 billion+ on the balance sheet. A "normal" market multiple is about 15x.

The issue that investors overlooked (and I was one of them) is that the earnings growth would slow so much and so rapidly. I contend this is what drove the multiple down to 9x or less. Indeed, such a price/earnings ratio indicate investors value the business with little to no growth prospects for the foreseeable future.

Perhaps the market overshot? It has such tendencies. However, I believe the multiple will expand when the investment community accepts that Apple can grow earnings (and / or cash) at a sustainable rate. It's important to note that Mr. Market will determine when this happens, not when "we" want or think it should happen.

But over time, if earnings and cash resume growth, the stock price will follow.

Therefore, investors (versus swing traders) must evaluate: will Apple management be able to resume earnings growth? If so, will this occur within a time frame that provides a reasonable return on investment?

There are some other factors (and mileposts) that can offer investor clues as to the stock's future. S.A. editors have published a couple of my articles about this.

Camden profile picture
Attempting to not be pejorative, I'll simply say I don't think this article makes sense.
Amazon is the bubble and not Apple ....... A company earning nearly $ 15 bn as revenues per quarter and generating profits in millions is a bubble and not apple which justifies every moment in its stock , whether positive or negative .....
OMG just stay disinterested in large caps, and you will at least have a chance to prosper.
It is naïve to predict a time series future based on comparison with a similar series, either from the same or from another source, as the author does in Charts 5 and 6. If he had compared Chart 5 with the AAPL chart for 2008 and the beginning of 2009 he would have reached the same conclusion but it would have been totally wrong.

I recall a foreboding academic article comparing an overlay of the 1987 market crash with the 1929 crash and forecasting a similar period of a future depressed market based on near perfect overlap. This forecast was of course totally wrong.
if by "come back " you mean pumping up their own stock - definitely - amazing how all the retail "investors" forgive and forget the pain inflicted by arrogant granpa timmi - they still have nothing to show but rumors - the stock is up because aapl is buying it while insiders are selling....which sounds a bit like they d / granpa timmi and friends would still rather have shareholders' cash than aapl shares. wow.
"...stocks become inflated with investor capital and their share prices rise to levels that exceed the stocks' fundamental values.
Apple fits this category perfectly."

Really? When you compare AAPL's P/E, you need to back the cash out of the price. When you do, AAPL's P/E is FAR below the average S&P stock. Furthermore, it's PEG is well below the S&P average AND it pays a much higher dividend than the average S&P stock, and the dividend is one of the most secure of any S&P stock. If you want a safe bet, buy AAPL and sell the S&P. When AAPL starts releasing new products in the next 12 months, the price will soar--easily > $600.
chenmj profile picture
This article pretends to be rational analysis based on both technical and fundamental analyses. however, I did not see one bit of fundamental here. Frankly, technical analysis alone does not worth much because stock movements are based on valuation perception changing events, true or rumors.
sws1967 profile picture
Sounds like an advertisement for this "I know first" company, but of course there are no concrete predictions given to prove that this "complex algorithm" can predict the future with any accuracy.

There is a major flaw in this argument - the author states that the stock price acts irrationally because of human behavior, but then states that the "algorithm" can accurately predict the future because it ignores the human irrationality. If the irrationality is driving the stock price, but being ignored by your algo, your algo will be wrong, right?

"The algorithm predicts the direction that stocks will move as well as the magnitude that they will move in that direction. The magnitude of the movement is measured by the "signal strength" - the higher the signal, the more upward potential for the stock."

Yeah...so given that this wonderful bit of code can tell the future, can't you do a little better than "I advise avoiding trading Apple stock for now."?!

What does that even mean - don't buy it and don't sell it and don't hold it?

MY algorithm says that AAPL will continue upward to $500 where it will wait to see if the products investors have been waiting for are released. If all we get are refreshes, the stock will drop and hang $400 - $450 through 2014. My algorithm uses quantum guessing (that means I guess a lot and then add all the guesses up while I draw a picture of a wave on the top of a page).
bjnflicks profile picture
If you want to se a bubble, look at Facebook or Tesla (unless everything goes right for them for years to come). Apple is the opposite of a bubble. It is a real old-fashioned sterling bargain value stock. And its future is virtually assured given it has 220 million of the most loyal well-heeled customers on the planet.
bjnflicks profile picture
Blackberry probably has only one hope of survival, being bought by the likes of Apple. Otherwise the stock could go down to almost zero.
kimboslice profile picture
For the further edification of the readers, most financial bubbles are paid for with credit.

1929: stock market bubble fueled by credit ( 100% margin). This is not allowed today.

2007: housing bubble fueled by credit. mortgage derivatives multiplied the risk and bad result.
lemyle profile picture
I wonder where was he a week ago? why till just only last few days of stocks market. I think market need a reset after the dividend declared.
bjnflicks profile picture
Apple was never a Bubble, even at 705 it had half the PE GOOG has now, and much better growth and earnings. No, it could not repeat the massive sales spurt releasing the original iPad and iPhones, and the stock needed to consolidate in the 600's, but the fall to 395 was a reverse bubble, a ridiculous undervaluation of the finest company in the world. That is why Apple committed 60 billion to buy back its stock, because the stock did not even begin to reflect the true value of the company. It was selling for far less than book value and some were even saying its best days were over and Samsung or someone else was the new leader. Not true, never true and Apple is on the verge of a whole new big product cycle now which should, if valued fairly, boost its shares back to the old highs.

Therefore, the entire premise of this article is false. There was no bubble. How can you it was a bubble at 500 billion market cap when they are generating 50 billion a year in free cashflow? If anyone could buy out Apple, they would probably have to pay 800 billion.; So Apple is still very cheap, and after this brief two sale consolidation, I strongly believe it will continue up and soon leave the 400's behind permanently. Plus they pay a nice dividend.
07 Aug. 2013
Apple will grow immensely in October. All envy Apple, but you cant stop it. Steve Jobs is still alive, you will see, they make products finally everybody wishes to have, thats it.
mostserene1 profile picture
Jobs is indeed dead, but the secret Icahn knows is that they successfully cloned him, and are waiting for the clone to mature before they download Steve's personality and knowledge.

Please keep this to yourselves or Apple will go through the roof!
Do the First's algorithms include a prediction of the Apple fall products and how they will be received? I doubt it, and if not...how can it have much credibility? You would have to argue that the stock price moves independent of the product receptions and consequent sales volumes.
sws1967 profile picture
Past performance will tell you exactly what to expect in the future....let's see....press button....crunch...okay, we have it! The stock will go up! Or down! (as long as you keep your subscription up to date;).
I'd like to see predictions of bubbles going forward, its a higher bar than backtesting.....
I'm glad I went right to the conclusion and missed most of the BS.
NDinMSP profile picture
I always go straight to the comments.
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