Apple-mania is back…well sort of. The stock’s 35% gains off of the January lows has been fueled by a combination of very poor sentiment, aggressive stock buybacks and once again the hope for new innovative products. In my opinion, what’s different this time is that investors have come to the realization that a company with expected sales of $180 billion in 2014 can’t possibly grow the way they had when they were essentially creating new product categories like smartphones and tablets out of thin-air. From here on out, 10% sales growth would be a monumental task and would once again take a sort of technology revolution. I have no idea whether they will able to do this again anytime soon, but some of the early estimates about price points, addressable market and margins on smart TVs, wearables and devices that connect the home don’t seem to get you there. If there was anyone to do it, it would be Apple, but with the stock approaching the prior highs, I think it is safe to say that some of the potential future innovation is in the stock.
On a PE basis, the stock remains cheap, and given their recent share buybacks and tax avoidance, it is likely to remain so as the company struggles to maintain double digit earnings growth. To be frank, it is hard to see too much multiple expansion for the largest market cap company in the world (approaching $600 billion) as the law of large numbers makes the sort of growth that’s rewarded by a premium market multiple quite difficult. Growth should be hard to come by for a company that sells commodity products, and has lacked innovation, of late.
The purpose of this post is not be negative about Apple, the stock, the products, valuation, or expected growth. The purpose is to take a look at current sentiment heading into the company’s fiscal Q3 earnings scheduled for July 22nd. The stock’s 7% gains since WWDC a month ago to new 52 week highs shows increasing enthusiasm, as the rumors around iPhone 6 reach a near fever pitch. I do think it is important to note while the iPhone specs and capabilities appear to be the worst-kept secret from Cupertino to Taiwan, there seems to be a growing consensus among the investment community that the stock is a sure thing to retake the all time highs, just above $100.
Heading into the Q3 print I suspect enthusiasm to continue to build, but let’s be honest, the current quarter guidance in front of a monster iPhone refresh has to be soft, and I am not sure playing for the next 5% to get to new highs 2 months prior to the phone launch makes a ton of sense.
Also important to note that when Apple was a full blown mania back in 2012, the stock recorded its ALL TIME HIGH on the day of the release of the hotly anticipated iPhone 5 on September 21st, 2012. So the questions I pose is history about to repeat itself? Has sentiment gotten too overly optimistic relative to what sort of results the company is able to deliver? And lastly is the stock setting up to make a double top for the AGES???
Full disclosure, once the stock broke in 2012/2013, I was of the belief that it would take years (more than two) for the stock to get back above $700 ($100 now). So the lesson for me is simple – just as stocks can overshoot on the upside, they can do so on the downside… and then rinse, wash, and repeat.