A Note on Apple Mania

by Don Gould

Note: This post first appeared in Gould Asset Management’s Economic and Market Review for the First Quarter of 2012, the entirety of which can be found here.  We’ve reprinted it here for the benefit of our blog subscribers.

Apple Inc. is best known in our financial world by its stock symbol, AAPL.  Not since one fell in Sir Isaac Newton’s garden in 1666 (inspiring his law of gravitation) has an apple carried such import for so many.    The question seemingly on every market watcher’s mind is, how long can this AAPL defy gravity?

The story of Apple is remarkable on so many levels – high flying personal computer pioneer cans visionary founder Steve Jobs, gets stomped by the Microsoft revolution, rehires Jobs, reinvents itself and launches a series of blockbuster products (iPod, iPhone, iPad), becomes the world’s most valuable company, and is rumored to have more hit products in the pipeline.  You can’t make this stuff up.

The company and its products inspire fierce loyalty among customers – almost anyone who owns an Apple product swears by it.  Apple combines form and function probably better than any consumer products manufacturer ever.  Not surprisingly, consumer market success has translated into financial stardom for AAPL.  As this is written in early April 2012, at $629 per share the stock has tripled in just two years and is up more than 50% in 2012 alone.  Apple has a market capitalization of $575 billion and is sitting on about $100 billion in cash.  The company is commencing a quarterly dividend and stock repurchases later this year.

Some see only blue skies ahead for the company – just this week, one securities analyst gushed, “Apple fever is spreading like a wildfire around the world and we see no end in sight to this trend.”  Comments such as that light up the animal spirits in even the most grizzled market veterans, while also setting off alarm bells in the background.  Some term this enthusiasm for Apple a bubble, but we would call it a mania.  A market bubble occurs when the price of something continues upward for no other reason than it’s been moving upward.  The working assumption is that there will always be someone else to sell to.  The late 1990s dot-com bubble saw huge valuations assigned to companies with no current earnings and no realistic prospect of any in the future.

In contrast, Apple is a phenomenally profitable company and perhaps even an attractively priced stock by conventional market metrics such as its price-to-earnings ratio.  Without question, AAPL can go much higher if new products (coming soon: iTV) are successful and existing products gain market penetration and market share.  What AAPL most assuredly cannot do is continue growing at its recent pace indefinitely.  Simple arithmetic tells us that at recent rates of growth, it won’t be long before Apple is larger than the entire US economy.  Sometime before that happens, growth will slow.  How and when remains to be seen, but count on the following factors to play a big role: market saturation, a misstep or two, and the biggie – competition.  As this is written, the next Steve Jobs is tinkering in a garage somewhere.

Our advice to AAPL investors – current and prospective – is simple.  Trees don’t grow to the sky (wish we’d made that one up), and when this AAPL starts showing signs of gravity, be sure you’ve not become so head-over-heels in love with the stock that you’ve violated the investment world’s own immutable law: having too many eggs in a single basket invariably ends in tears.

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