Should Apple be a $200 stock?

By Bethany McLean
February 6, 2013

According to the numbers, Apple’s battered stock is one of the best bargains of all time. Since hitting a high of almost $700 last fall, shares have plummeted 37 percent, to $442, including a 12 percent drop in late January after Apple posted flat year-over-year profits, which bitterly disappointed the Street. Apple now trades at just over 10 times last year’s profits and roughly eight times Wall Street’s estimate of next year’s earnings — well below the average of the Standard & Poor’s 500-stock index. Plus, Apple is set to begin paying a dividend of $10.60 a share, well above the yield on Treasuries.

Fortune estimates that 29 of 36 analysts covering Apple rate it some form of buy, with a median price target of $605 per share. One analyst, who dubbed the company the “trillion dollar baby” based on his belief that Apple will one day have a market value that exceeds $1 trillion, still maintains his price target of $880 per share.

Maybe so. But scratch beneath the surface, and there is an argument that Apple isn’t so much a great bargain as it is a classic “value trap” — a company whose stock price is depressed for good reason.

Start by looking closely at what has been the driver of Apple’s phenomenal growth — the iPhone, which accounted for just over 50 percent of Apple’s fiscal 2012 revenues and almost two-thirds of profits, according to one longtime Apple analyst.

Although Apple did hit estimates for iPhone sales in its last quarter, the stock declined in part because of intimations that the age of the iPhone might be coming to an end. “Fight to unseat iPhone intensifies,” wrote the Wall Street Journal in late January, which said that while two-thirds of the smartphones Verizon said it activated in the fourth quarter were Apple devices, more than half were older, heavily discounted models. The Journal also reported that iPhone sale srose less than the overall increase in the global smartphone market. Meanwhile, a Reuters piece reported that in Singapore and Hong Kong, Apple’s share of mobile devices seems to be falling. Reuters noted that these regions are leading indicators of what’s going to be hot in Western Europe and North America.

Apple’s position is still enviable. But built into Wall Street’s stock price targets was the expectation that the iPhone would rule the world. And for a while, it looked like it would. But maybe that was a fluke. After all, Steve Jobs didn’t build devices that were supposed to appeal to everyone. Instead, he built expensive products for which Apple, and Apple alone, curated the technology that would be available to users. That’s not a recipe for market share dominance.

One reason Apple looked like it would dominate despite that mindset is the quirkiness of the mobile phone market. In many areas of the world, including the U.S., mobile phone purchases are subsidized, so even though Apple’s phone is far more expensive, the carrier pays more, and the end customer doesn’t see all of the price difference. There has long been a discussion about whether that arrangement will come to an end, and there are a few reasons to believe it might. If bandwidth is indeed in short supply, then the carriers will have more clout, and they’ll start pushing back against the subsidies. That implies margin pressures for all mobile phone makers, but in particular Apple, given the abnormal subsidy it has been able to extract. In addition, if the iPhone is no longer the single must-have product, then Apple may lose some of its clout with carriers. Apple’s virtuous circle—because customers crave its products, carriers have not choice but to pay up — could turn vicious.

Some stellar new product, like a full-blown Apple TV or an electronic payment system, or something we haven’t even imagined, may be about to explode on the scene. Maybe. As a company, Apple doesn’t talk about what’s next, and anything is possible. But the evidence isn’t promising. On Apple’s most recent earnings call, Chief Financial Officer Peter Oppenheimer said that today was the “most prolific product period in Apple’s history … in the last few months, we’ve introduced new products in every category we make.” But the products are more evolutionary than revolutionary. And what we do know is that many of the people who created the Apple that now exists — Jobs, former retail chief Ron Johnson, former software chief Avi Tevanian, former hardware maestro John Rubinstein — are no longer there. Just like the Magellan Fund of the 1990s wasn’t Peter Lynch’s Magellan, this company is no longer the same Apple.

There are also challenges. For instance, Apple TV isn’t iTunes: The cable companies seem to understand that they are better off protecting their own ecosystem, instead of letting the wolf in the shape of Apple waltz in the door and pick off the choicest part of their revenue stream. And while Apple could indeed blanket the earth with products that fill every niche, that would entail a very different strategy than the one that brought the company to where it is today.

You might argue that all these fears are reflected in Apple’s discounted stock price. But while the stock is cheap based on the profits of the past few years, value investors generally look to what they call normalized earnings, or true earnings power. To put this a different way, price-to-earnings ratios don’t matter that much when you don’t know what real earnings are. We won’t know for a few more years, but there’s an argument that Apple’s last few years of blowout earnings have been well above normal. If that’s true, then Apple’s real p-e ratio might be much higher than it appears.

Apple believers also point to Apple’s massive cash hoard—$137.1 billion and counting—as a floor beneath the stock price. (The Wall Street Journal has pointed out that since much of the cash is parked overseas, adjusted for taxes, it’s more like $111 per share, but that’s still an awful lot of money.) Historically, Apple has been disciplined with its cash, and Chief Executive Officer Tim Cook is regarded as a master of supply-chain management, meaning that even if Apple’s volumes decline, the company isn’t going to start bleeding cash. The counter is that, especially in tech land, companies that start to dry up on innovation soon start to burn cash, whether because shareholders demand more and more return in the form of dividends or because the company feels forced to do cash acquisitions. In Apple’s case, its retail stores could become a millstone around the company’s neck if huge sales of high-margin iPads and iPhones no longer pay for all that premium real estate.

Too dire? Quite possibly. But just because Apple’s stock once sold for almost $700 doesn’t mean it should ever see those heights again. Just ask the investors who owned AOL back in 2001.

PHOTO: The Apple logo is shown on the front of the company’s flagship retail store near signs for the central subway project in San Francisco, California January 23, 2013. REUTERS/Robert Galbraith

17 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Of all the biz opinion pieces churned out over the past year on Apple, this is one of the worst and dumbest and baseless, which is saying a lot, given that most “analysis” of AAPL is through the looking glass totally off the mark.

Posted by timebandit | Report as abusive

The worst and dumbest and most baseless business pieces probably were the ones where people were talking (hyping or grass feeding) about Apple being a $1000 stock.

The age of the iPhone is plateauing, get used to it.

The more one reads about Apple/Jobs the more horrible the picture of the man and the business practices:

http://arstechnica.com/apple/2013/01/ang ry-over-employee-poaching-steve-jobs-thr eatened-palm-with-patent-suit/

Posted by TheUSofA | Report as abusive

So, how’s your HP and Dell stock doing?

Posted by MeTooFull | Report as abusive

“more than half were older, heavily discounted models”
…of Verizon sales. iPhone 5 was heavily constrained most of the quarter. Apple was not selling these phones for a discounted price. iPhone ASPs did not decline in the quarter so the mix of product couldn’t have changed either, unless they sold a larger number of higher value iPhone 5 32/64 GB handsets to balance out more 4s and 4Ss

“adjusted for taxes, it’s more like $111 per share”
No. Most tax charges for off shore earnings are taken (and accounted for) in the quarter in which they’re earned. This is “escrowed) money not included in the cash accumulation amount. Were Apple to declare that they had no intention to ever repatriate this money (as many multi-national companies do with their foreign earnings), they could immediately add these escrowed tax payment monies to their 137B. Similarily, were they to repatriate monies in the current (or future) quarter they would not incur a tax charge in that quarter as those charges have already been accounted for in a previous quarter.

There’s a lot more that’s wrong with this article, but I’d prefer the editor would do his/her job instead of a reader. Pretty much, this is crap. Very disappointing.

Posted by davidnkeng | Report as abusive

Great article. Ignore the naysayers that called foul about every article as Apple fell from 700-600-500-400…

Posted by BrodyV | Report as abusive

So, if the cash is $111 per share after taxes, how does one arrive at a share price of $200 per share? Even if one assumes that Apple’s earnings have peaked and will decline, its future profits ought to be worth quite a bit more than $89 per share. You’d have to assume both that Apple declines precipitously and that it wastes most of its cash stockpile in a futile effort to turn things around.

I also struggle with how Apple’s retail stores become a “millstone” anytime soon. Apple typically has small footprint stores located in mid-scale to high-end shopping centers. Apple’s retail sales per square foot are outstanding – $6k per square foot. To give an idea, that’s double number 2 (Tiffany’s) and approximately 6x the #10 retailer in a survey of 200 U.S. retailers ( here – http://www.pcmag.com/article2/0,2817,241 2094,00.asp ) To put things in context, typical successful mall-based specialty retailers (apparel store chains, jewelry chains, etc.) have sales per square foot in the $400 to $600 range operating out of similar real estate . So Apple’s retail stores should make money even if sales per square foot drop 90%, though they’d obviously have to cut back on staffing.

Posted by realist50 | Report as abusive

Bethany love, don’t ever start your own business. If you think market share is more important than net profit, you won’t last long.

Further to what others have said well, the reason for the discounted Verizon smartphones is that the only way the competition can sell against the iPhone is with discounted prices. Not all of the profit Apple makes comes from the actual sale of the device itself either – there is the ecosystem of music, apps and rentals which also bring in cash and locks users in because of the money they have invested in these items. No other manufacturer gets anywhere close to Apple on this – Apple has seriously high loyalty numbers. Since the iPhone the Mac market share has trebled as well, so you are well off the mark with pessimism.

If you only change one thing about how you write, make it this silly obsession with market share! Apple doesn’t care diddly squat about market share; profit share is another matter, and here Apple rules the roost comprehensively.

Posted by FifthDecade | Report as abusive

I had to sign up just to comment on this article. It is difficult for me to find any article that will provide an opportunity for my jaw to drop at, not the inconceivability, but at the sheer lack of even the most basic functions of the stock market. First, regardless of what Apple has on the balance sheet today, at the end of this year they will have close to $200 Billion. By the end of 2014, and let’s face facts even if sales slow down, they are not going to just stop, they will have $250 Billion lying around, which indicates that this brilliant analysis indicates that Apple will be worth less than the cash they will have on hand. Oh and did I mention that EPS for 2013 even reduced is still on target for at least $45 per share. So that is right, cash on hand + EPS for 2013 this argument indicates that Apple could be worth less than what they have on hand plus what they will earn.

If I was Reuters I would be thoroughly embarrassed to allow this “analysis” on their pages. It is one thing to make a cogent argument about the difficulties that Apple may face in upcoming years, it is another thing to publish this embarrassing drivel. Did anyone mention to Ms. McLean that even though the “era of the Ipod” is long over, they still sold 12.7 million last quarter? You think the tens of millions of people in the Apple ecosystem are simply going to just walk away? Your argument is that people are simply and immediately going to stop buying all things Apple is worthy of a D paper in an Econ 101 class. Oh and not a single word, not a single word in the entire article about a little thing called the Ipad.

You can make the case about the uber bullish analysts marking the top for Apple, you can make the same case for the bottom when this type of article is published.

Posted by zonaindie1 | Report as abusive

1170 words, and you managed to mention the ipad only once, implying that it is a high margin millstone. Pretty nice millstone to have, considering that it disrupts pcs, and Apple doesn’t have to please carriers to sell. Ever wondered why Apple doesn’t see serious competition in the tablet market?

The reason aapl is not so hot is because Apple focus on products, employees, customers, supply chain, regulators, and shareholders, in that order, and Wall Street nows it.

Now, write a 1200 word column on why Amazon is undervalued.

Posted by DanKarreman | Report as abusive

Apple is the altar that Steve Jobs built for his worshipers, mostly out of their frustration with Windows. Some smart business people have hitched a ride on their adoration. Now that Jobs is gone it is doubtful that anyone else can keep all the candles burning.

Posted by thinkb4its2late | Report as abusive

If I had the need to waste $400 / yr on a data plan, I think I would be a buyer of the iPhone over anything Android. In large part, I would want uniform apps between the phone and my decision to adopt the iPad as my tablet … oh, and Android apps are simply too primitive.

Posted by SanPa | Report as abusive

OK, we are now seeing a lot of piling on as many, many writers are writing doom and gloom articles about Apple because they somehow did not meet Wall Street expectations for one quarter. I appreciate that this article is really better than most. Perhaps Apple as a company is approaching middle age, but it is certainly not anywhere near being over the hill. Middle age for a company can be a long period of moderate growth and raking in profits. Apple’s long history and culture of innovation bode well for the company.

As far as the competition in smart phones, I will leave you with a slogan:

“Remember the Zune!”

Posted by QuietThinker | Report as abusive

The computer companies and phone companies are the masters of planned obsolescence. If the dummy consumer ever wises up, apple will be worth less than 200. However, that is not likely to happen since most people accept their mind/thought training very well. So, don’t worry, the consumer will never come out of their stupor and so money will stil be there to be had. Don’t worry either about the bad press on the worker treatment in China, American don’t care.

Posted by brotherkenny4 | Report as abusive

Macaloped.

Posted by stefanag | Report as abusive

Apple has $145B of cash on hand. Name as many corporations in America as you can that are WORTH $145B (very very short list) let alone have that much cash on hand. Put that in perspective, that’s enough cash to buy every football team in the NFL..TWICE! The same wall streeters that are pushing Apple’s stock lower (PE of around 10) are pushing Facebook stock (PE 75) higher. Don’t listen to Wall Street. And short FB every time just before they post earnings. Almost guaranteed to make you money.

Posted by xyz2055 | Report as abusive

Hi, spotted some typos; “iPhone sale srose” and “carriers have not choice but to pay up”.

Anyway, I don’t let that cloud my view of the professionalism\worth of your piece. I assume you think, on balance, what you say is possible enough to write about it, and you are not just trying to up your page view stats.

You are basically saying that iPhone sales could reduce to such a degree that the companies earnings will be reduced by say about 60% of what they are today (hence a comparable drop in share price). That is, since iPhone sales are (as you say – have not checked) about 66% of profits for the company, iPhone sales should be treated as being practically zero, for company valuation purposes. You do not mention the other products that make up the balance of the companies profits (e.g. iPad) so I assume you do not expect (declining or not) sales of these to contribute to the decline to the $200 per share price, rather that is all they will have left.

The iPhone achieved over 50% market share in the last quarter in the US for the first time.
This does not square with the (predictive) model of the analyst you linked to under the word vicious. Being near the end of a Mathematics and Statistics degree, I was not impressed by this analysis; rubbish in rubbish out. Not sure you understand what your are linking to.

In a nutshell you think, on balance, that there is a reasonable enough possibility to state, in public, in print, that their iPhone business will disappear (soon\very soon), and that the company should be valued, today, accordingly.

On this basis I doubt the professionalism\worth of your piece.

Posted by rush2013 | Report as abusive

After that nightmare with the maps app. The stock began to fall and the smart money left. Tim Cook is a good man but he’s no visionary. Steve Jobs was. Don’t get me wrong its still a great company but there are better cheaper values around. Unless they have a ground breaking new cool device coming the better question might be what will push the stock up.

Posted by IloveLinux | Report as abusive