Trees don't grow to the sky. And to that we can add: Apples
eventually fall off the tree.
Keeping with the metaphor,
Apple Inc. (
AAPL
)
, if not having fallen from the tree, is hanging precariously
from a very high branch.
No one can say for sure if Apple's share-price run is over,
but its recent
price decline
should give investors (new investors in particular) pause - over
the past month, Apple's share price is down 13%.
So is Apple poised to become a flat-lining tech stock like
Microsoft (
MSFT
)
or
Cisco Systems (
CSCO
)
?
Obviously no one can answer this question with a high degree
of certainty. But if any investor thinks past will be prologue,
he should think long and hard about his
assumption.
Over the past decade, Apple shares are up roughly 8,400%. In
comparison, the NASDAQ Composite Index is up 150%. Apple's
revenue has grown at a 34% average annual rate over the period,
while its EPS has grown at a remarkable average annual rate of
77%.
Apple has not only grown, it has grown efficiently.
Apple's flawless execution has lifted its market cap to a
whopping $580 billion. A decade ago it was $3.6 billion.
Long-term Apple investors have seen the value of their investment
increase by an average of 66% annually.
The growth rates are extraordinary, which is why they are
unsustainable. If Apple's market cap continued to compound 66%
annually, it would reach $92 trillion by 2022. That's not going
to happen. Trees don't grow to the sky.
If I were to weigh the odds, I would bet that the
halcyon days
of the past decade are over.
Now don't misunderstand. Apple remains a great company with a
great product line. I've seen people stand 50 deep on a Monday
morning waiting for an Apple store to open (and with no special
occasion). It could very well - and probably will - continue to
be a great company for years to come.
But great companies don't equate to great investments,
particularly great companies that have produced years of
extraordinary returns. Great companies attract competition.
That's economics.
What's more, greatness is
impossible to sustain
indefinitely. Yes, Apple has done little wrong in the 2000s, but
let's not forget that it was having trouble doing much right in
the 1990s.
Many investors will argue that Apple is still reasonably
priced, trading at only 9.5 times next year's EPS estimate of
$63.50. Keep in mind, though, that this EPS estimate is 42%
higher than this fiscal year's EPS of $44.57.
In other words, estimates remain lofty. And when lofty
estimates aren't met, companies can get
punished
, as
Google (
GOOG
)
recently proved.
Though unlikely to get punished to Google's extent, Apple
shares could end today roughed up after last night's earnings
release. The company reported revenue of $41 billion and earnings
of $8.2 billion, or $8.67 per share, for the quarter ended
September 29.
These are great numbers, to be sure: Revenue is up 44% and EPS
is up 22% year over year.
Apple handily beat Wall Street estimates for $35.8 billion in
revenue for the quarter. Unfortunately, it didn't match lofty
quarterly estimates for EPS of $8.75. In after-hours trading,
Apple shares dipped below $600, though they have recovered in
this morning's early action.
To belabor the obvious, great companies like Apple attract a
lot of money. There is a lot of money sloshing around these days
thanks to the Federal Reserve, which has tripled the base money
supply over the past three years. What's more, the Fed continues
to pump in new money at a rate of $40 billion per
month.
Much of the Fed's new money has found its way to institutional
investors through the interbank market. These institutional
investors have, in turn, allocated more money to Apple
shares.
The question is, has Apple attracted more investor interest
because of its fundamentals or because there is so much new money
that Apple's size makes it the most viable outlet?
This is a difficult question to answer, and that heightens
uncertainty.
Apple's impending
iPad Mini
launch might yet be another hit, but recent price action in Apple
shares suggests consumer fatigue might be setting in. If that's
the case, Apple investors could see their shares finally break
loose from that high branch.