Apple $400: A Look at Apple?s Fundamentals Part I
AppleInsider contributor and independent analyst Andy M. Zaky offers a sigh of caution regarding fundamental analysis and matters surrounding Apple's valuation.
Until recently, I?ve been silent on the issue of Apple?s (AAPL) valuation because I feel that such an analysis could be misleading when improperly used to try and forecast Apple?s short or intermediate term price action. Far too many people are betting that Apple will see $300 or $400 a share by this January owing to its strong fundamentals. While I agree that Apple is worth a lot more than what is reflected in its current market price, a long-term viewpoint is the only practical way to rely on fundamental analysis as a basis for investment decisions. Allow me to illustrate.
On August 20, 2008, renowned Apple analyst Gene Munster argued on CNBC?s Fast Money that technology stocks generally tend to outperform in the fall and winter months, and that Apple?s cheap valuation meant that it was time to buy the stock. Munster had a famous $250 price target on Apple at the time. In fact, nearly every analyst on the street had $200 price targets on Apple citing exceptionally strong ?fundamentals? as a basis for their recommendations.
Yet, 30 trading sessions later, Apple (AAPL) dropped from $175.84, when Munster and several hundred other market participants were touting the stock as being ?undervalued,? to a close of $89.16 on October 7. Apple wouldn?t see $200 a share for almost 15 months. Nearly every analyst on the street flipped 180 degrees on Apple cutting price targets, estimates and citing valuation concerns as a basis for downgrading their buy recommendations to neutral and sell.
RBC analyst Mike Abramsky cut his price target from $200 that August to $125 in late September. Morgan Stanley?s Kathryn Huberty cut her price target on Apple two weeks in a row from $190 to $179 on September 22, 2008 and again from $179 to $115 a share just one week later. By mid-November, Apple stabilized in the $80 to $90 a share range. Even long time Apple enthusiast Jim Cramer noted on several occasions during this period that he couldn?t recommend Apple at $90 a share.
Meanwhile, Apple reported one record quarter after another, and it even posted 125% earnings growth in the September quarter of the financial crisis. The iPhone deferred revenue system masked Apple?s true earnings power making it very difficult for fund managers to adequately valuate the company during the post-crisis P/E compression era. And though the company was undervalued, it didn?t stop the market from pricing the stock at a 70% discount to its theoretical value.
By the end of October, I published a detailed analysis demonstrating that Apple was likely the most undervalued large cap tech stock in the sector. I argued against long time Apple enthusiasts that despite what the investment community might hear from analysts, Apple was a strong buy at $80 a share. I made several arguments as to why the market would bottom in March and that Apple would see $230 within a 2-year period.
Yet, instead of seeing opportunity in Apple?s (AAPL) cheap valuation, Mike Abramsky downgraded the stock to underperform in January 2009, and lowered his price target to $70 a share. The market bottomed just a month and a half later, and Apple significantly outperformed the market posting nearly 250% gains in the next year and a half ? more evidence that fundamental analysis is only valuable when used to make long-term predictions. So what exactly did Mike Abramsky?s clients gain from this analysis? Abramsky, like nearly every other analyst, was literally advising clients to buy in the $180 a share range and sell at $80?s a share. Is it any wonder why analysts continue to be the laughing stock of Wall Street?
The lesson here is not that so many got it wrong ahead of and during the financial crisis, however. Rather, what investors should take from this history lesson is that price targets are often good in theory but fatal in fact. Attempting to put intermediate or short-term price targets on any stock based exclusively on fundamental analysis is really an exercise in futility. And before you dismiss the financial crisis as merely an outlier, think again. Apple?s stock has collapsed by over 30% on at least 4 separate occasions over the past few years. See here.
Secondly, and more importantly, it?s very hazardous to rely on a stock?s fundamentals to put a floor underneath its price. All stocks are risky assets, and have the potential to trade at very distressed levels. To unequivocally deny the possibility that Apple could see a short or intermediate term collapse just because it has strong fundamentals is one of the most dangerous viewpoints that anyone could entertain. While its very unlikely that Apple will see such distressed levels anytime soon, the point here is that strong fundamentals don?t make certain stock immune from torture.
Quite often, investors are forced to unload their biggest winners in order to meet hedge fund redemption requests. Other times funds de-risk by shifting-away from an equity strategy to the safe haven of less riskier assets in fixed income. Macro-economic concerns can lead to massive short-term declines in share value. There are countless factors that can conspire to bring Apple down to extreme levels. In fact, colossal mutual funds outflows have been ongoing for the past several months, indicating that a major sell-off might loom on the horizon. With a major lack of market participants, any major event can completely unhinge this market.
Research in motion (RIMM) is a fundamentally sound institution that is clearly undervalued on any widely accepted metric of valuation. That doesn?t stop the inefficient market from pricing the stock at less than half of what ought to be worth. Every stock, including Apple, is at the whim of the larger concerns of the broader market.
So just because a stock has strong fundamentals, just because it is undervalued based on widely accepted metrics, or just because everyone has $300 to $400 price targets doesn?t mean that the stock will see those levels in any short or intermediate term time frame. Instead, the only advantage available to investors is having a long-term viewpoint of the markets. Apple is probably worth $400 a share ? but only in the long term. The only thing one can say with any degree of confidence is that Apple will probably see much higher levels some time within the next few years.
Keeping these reservations in mind, I?ll be offering a thorough fundamental analysis of the company. But I would be remiss if I didn?t first disclose just how cautious investors should be when entertaining these very theoretical exercises. Price targets are really just a picture of what a company ought to be trading at in a theoretically rational, and efficient market sometime in the distant future. And yet, this market is rarely rational and hardly efficient in its pricing structure. Please don?t take my skepticism of using fundamentals to forecast short-term price action as general skepticism toward Apple. That would be a gross misinterpretation of this analysis. Instead, view this analysis as a sigh of caution regarding fundamental analysis in general. Stay tuned.
Andy Zaky is a graduate from the UCLA School of Law, an AppleInsider contributor and the founder and author of Bullish Cross -- an online publication that provides in-depth analysis of Apple's financial health.
Until recently, I?ve been silent on the issue of Apple?s (AAPL) valuation because I feel that such an analysis could be misleading when improperly used to try and forecast Apple?s short or intermediate term price action. Far too many people are betting that Apple will see $300 or $400 a share by this January owing to its strong fundamentals. While I agree that Apple is worth a lot more than what is reflected in its current market price, a long-term viewpoint is the only practical way to rely on fundamental analysis as a basis for investment decisions. Allow me to illustrate.
On August 20, 2008, renowned Apple analyst Gene Munster argued on CNBC?s Fast Money that technology stocks generally tend to outperform in the fall and winter months, and that Apple?s cheap valuation meant that it was time to buy the stock. Munster had a famous $250 price target on Apple at the time. In fact, nearly every analyst on the street had $200 price targets on Apple citing exceptionally strong ?fundamentals? as a basis for their recommendations.
Yet, 30 trading sessions later, Apple (AAPL) dropped from $175.84, when Munster and several hundred other market participants were touting the stock as being ?undervalued,? to a close of $89.16 on October 7. Apple wouldn?t see $200 a share for almost 15 months. Nearly every analyst on the street flipped 180 degrees on Apple cutting price targets, estimates and citing valuation concerns as a basis for downgrading their buy recommendations to neutral and sell.
RBC analyst Mike Abramsky cut his price target from $200 that August to $125 in late September. Morgan Stanley?s Kathryn Huberty cut her price target on Apple two weeks in a row from $190 to $179 on September 22, 2008 and again from $179 to $115 a share just one week later. By mid-November, Apple stabilized in the $80 to $90 a share range. Even long time Apple enthusiast Jim Cramer noted on several occasions during this period that he couldn?t recommend Apple at $90 a share.
Meanwhile, Apple reported one record quarter after another, and it even posted 125% earnings growth in the September quarter of the financial crisis. The iPhone deferred revenue system masked Apple?s true earnings power making it very difficult for fund managers to adequately valuate the company during the post-crisis P/E compression era. And though the company was undervalued, it didn?t stop the market from pricing the stock at a 70% discount to its theoretical value.
By the end of October, I published a detailed analysis demonstrating that Apple was likely the most undervalued large cap tech stock in the sector. I argued against long time Apple enthusiasts that despite what the investment community might hear from analysts, Apple was a strong buy at $80 a share. I made several arguments as to why the market would bottom in March and that Apple would see $230 within a 2-year period.
Yet, instead of seeing opportunity in Apple?s (AAPL) cheap valuation, Mike Abramsky downgraded the stock to underperform in January 2009, and lowered his price target to $70 a share. The market bottomed just a month and a half later, and Apple significantly outperformed the market posting nearly 250% gains in the next year and a half ? more evidence that fundamental analysis is only valuable when used to make long-term predictions. So what exactly did Mike Abramsky?s clients gain from this analysis? Abramsky, like nearly every other analyst, was literally advising clients to buy in the $180 a share range and sell at $80?s a share. Is it any wonder why analysts continue to be the laughing stock of Wall Street?
The lesson here is not that so many got it wrong ahead of and during the financial crisis, however. Rather, what investors should take from this history lesson is that price targets are often good in theory but fatal in fact. Attempting to put intermediate or short-term price targets on any stock based exclusively on fundamental analysis is really an exercise in futility. And before you dismiss the financial crisis as merely an outlier, think again. Apple?s stock has collapsed by over 30% on at least 4 separate occasions over the past few years. See here.
Secondly, and more importantly, it?s very hazardous to rely on a stock?s fundamentals to put a floor underneath its price. All stocks are risky assets, and have the potential to trade at very distressed levels. To unequivocally deny the possibility that Apple could see a short or intermediate term collapse just because it has strong fundamentals is one of the most dangerous viewpoints that anyone could entertain. While its very unlikely that Apple will see such distressed levels anytime soon, the point here is that strong fundamentals don?t make certain stock immune from torture.
Quite often, investors are forced to unload their biggest winners in order to meet hedge fund redemption requests. Other times funds de-risk by shifting-away from an equity strategy to the safe haven of less riskier assets in fixed income. Macro-economic concerns can lead to massive short-term declines in share value. There are countless factors that can conspire to bring Apple down to extreme levels. In fact, colossal mutual funds outflows have been ongoing for the past several months, indicating that a major sell-off might loom on the horizon. With a major lack of market participants, any major event can completely unhinge this market.
Research in motion (RIMM) is a fundamentally sound institution that is clearly undervalued on any widely accepted metric of valuation. That doesn?t stop the inefficient market from pricing the stock at less than half of what ought to be worth. Every stock, including Apple, is at the whim of the larger concerns of the broader market.
So just because a stock has strong fundamentals, just because it is undervalued based on widely accepted metrics, or just because everyone has $300 to $400 price targets doesn?t mean that the stock will see those levels in any short or intermediate term time frame. Instead, the only advantage available to investors is having a long-term viewpoint of the markets. Apple is probably worth $400 a share ? but only in the long term. The only thing one can say with any degree of confidence is that Apple will probably see much higher levels some time within the next few years.
Keeping these reservations in mind, I?ll be offering a thorough fundamental analysis of the company. But I would be remiss if I didn?t first disclose just how cautious investors should be when entertaining these very theoretical exercises. Price targets are really just a picture of what a company ought to be trading at in a theoretically rational, and efficient market sometime in the distant future. And yet, this market is rarely rational and hardly efficient in its pricing structure. Please don?t take my skepticism of using fundamentals to forecast short-term price action as general skepticism toward Apple. That would be a gross misinterpretation of this analysis. Instead, view this analysis as a sigh of caution regarding fundamental analysis in general. Stay tuned.
Andy Zaky is a graduate from the UCLA School of Law, an AppleInsider contributor and the founder and author of Bullish Cross -- an online publication that provides in-depth analysis of Apple's financial health.
Comments
Again great post
Buy AAPL !!!
thanks or summing that up. Now I won't even bother to read the article. no, really- I won't.
Why do one analysts say buy, and the other say sell? Because they are all self-serving brokerage pimps. Their actions make me sick.
Consider these:
1) iPhone 4 on more countries. like, say, China.
2) iPhone 4 on Verizon, Sprint and T-mobile.
3) iPad on more countries.
4) Cheaper iPads.
5) iPod Touch w/ Facetime and retina display.
6) the iTV
7) iAds
8) Mac sales
9) New Products
It's only a matter of time.
Consider these:
1) iPhone 4 on more countries. like, say, China.
2) iPhone 4 on Verizon, Sprint and T-mobile.
3) iPad on more countries.
4) Cheaper iPads.
5) iPod Touch w/ Facetime and retina display.
6) the iTV
7) iAds
8) Mac sales
9) New Products
Don't forget that Apple now has 300 Apple Stores, that are always packed with people spending money, with many more to come!
What really impresses me most about Apple is that based on some of its' patent applications, they are truly thinking outside of the box and may announce something new, in a category that we would never would have dreamed of. Steve, Jonathan and others with Apple are the Walt Disney's of the 21st century.
Don't forget that Apple now has 300 Apple Stores, that are always packed with people spending money, with many more to come!
Agree.
It has grown from small to where it is now, but that can’t go on forever or what? After all, the number of buyers isn’t infinite, and Apple still only sells products on this planet.
So when it reaches $400, it must stay there, or what?
Not many months ago, it was said that Apple had passed Microsoft and was now the second largest company in the US, Exxon being number one, based on market cap (share price · number of shares). It may have been temporary, and perhaps it was one way of calculating market cap, and maybe I remember wrongly but nevertheless?
It has grown from small to where it is now, but that can?t go on forever or what? After all, the number of buyers isn?t infinite, and Apple still only sells products on this planet.
So when it reaches $400, it must stay there, or what?
Apple has less than 10% of the CPU market (best guess)
Apple has less than 14.2% of the smartphone market (sales Q22010)
Apple has less than 2.7% of the cell phone market (sales Q22010)
The only business where Apple dominantes is the iPod/iTunes business. iTunes makes ver little profit, while iPods make some good cash - but that is a maturing market, and the sales are largely upgrades. If Apple was only iPods I woud agree with you.
There is lots of room for growth on the other three, and there is evidence that the iPod 'halo effect' has morphed into an 'iPad halo effect'. And the iPad is bought already by many corporations... Much growth to be expected in the CPU arena, imho. E.g. a large State University I work at seems to be shifting form Dells to iMacs (and installs Windows) because of the great quality reputation, and lower cost of ownership (I'm not sure the lower cost of ownership holds up with Windows installed, but that is what is happening)
The main question is: Can Apple keep those phenomenal margins, thus profits, and can it continue to innovate as much as it has with a bare bone research budget [yes Apple research budget is a (small?) fraction of Microsoft]
The other question that plagues me, what is Apple going to do with all of that cash???? If the growth continues, the few 100 mills being spent on acquisitions is not going to make much of a dent in the Billions of $ cash pile... And Apple can't really buy a really big company that costs billions, the culture would not transfer or translate, and there would be a serious risk of beginning a rot from within form loss of the culture. Better if Apple grows, and in so has everyone on board, culturally speaking. And, do not underestimate the importance of corporate culture for long term success! Short term success with cost cutting, lucky product, etc. possible. Sustained success and continued innovation needs more than managers minding the bottom line, it needs a certain way of thinking from every employee, all of the time.
I smell a dividend of Alpine proportions some day, better own stock to get your piece of that action.
Just some thoughts.
...
So when it reaches $400, it must stay there, or what?
No, because buyers with the stock will sell to make a profit. And down it will go again. The value will go up only for as long as people think it's "undervalued". When it has the "right" value buyers will want to turn in a profit, which will affect the price because everyone *else* will think "hey I better get out too". I'm not an expert, but up and down is the natural order of things.
I still can't see how the stock will be worth another $100, especially with the competition from Android on the iphone front. But still, anything's possible.
I do not trust analysts. Most of them I believe just throw dots on the wall. If you buy and sell on their recommendation, you will be bankrupt. And the ones on the TV shows are even worse, just a bunch of clowns. When they are telling you to buy, they are selling.
Why do one analysts say buy, and the other say sell? Because they are all self-serving brokerage pimps. Their actions make me sick.
I agree with you, but I can tell you that Andy Zacky has a phenomenal track record in predicting AAPL, better than anyone else. By far.
And he puts his money where his mouth is, at least he says he does: In late 2008, when AAPL was in the $80's, he wrote in his blog that he was selling his house to put all the money into AAPL. At the time, he wrote that AAPL was a $200+ stock (the only one who thought the same publicly, was Gene Munster. Munster got a lot of flak for holding steady on a target price over $200 when AAPL was tanking)
I don't know if he went through with converting his house into AAPL stock, but you got love that passion for the stock.
I agree with you, but I can tell you that Andy Zacky has a phenomenal track record in predicting AAPL, better than anyone else. By far.
And he puts his money where his mouth is, at least he says he does: In late 2008, when AAPL was in the $80's, he wrote in his blog that he was selling his house to put all the money into AAPL. At the time, he wrote that AAPL was a $200+ stock (the only one who thought the same publicly, was Gene Munster. Munster got a lot of flak for holding steady on a target price over $200 when AAPL was tanking)
I don't know if he went through with converting his house into AAPL stock, but you got love that passion for the stock.
Agreed. Andy does a tremendous job. Thanks for the article, Andy. We could sure use more of your commentary.
Apple's topped, along with the rest of the market. Sell everything and wait for a better day.
If that happened, it would be a great buying opportunity, given my time horizon.
Don't forget that Apple now has 300 Apple Stores, that are always packed with people spending money, with many more to come!
Are they? The ones I have been in were full of people browsing the internet on the computers, it made it difficult to look at things.