Apple stock has been on a roller coaster during the two weeks leading up to last night’s results. The doom-mongers have been out in force, suggesting the end is nigh. For the first time, there have even been suggestions that Apple’s stock price is a bubble waiting to burst. Well, it certainly hasn’t burst this quarter judging by the 94 percent year-on-year earnings.
Critics are right in one sense: Nothing goes up for ever and at some stage there must be a correction. However, a correction is not the bursting of a bubble. I really don’t buy the bubble theory.
If we look at past bubbles, from the south seas to Dutch tulips and, even, to the dot.coms of the late 20th century, they are all characterised by high expectations based on absolutely no substance. Apple, on the other hand, is all substance with modest expectations. That’s why Apple has such a low price/earnings ratio of under 14. Compare that, for instance, with Amazon’s P/E of 139. Spot the bubble, if there is one.
Apple is a proper trading company, with good products and incredibly high profit margins. It has a world-wide network of wholly-owned stores which are obviously doing well. Whether you measure the stores by sales per square foot or by footfall, these are enormously successful enterprises. And, unlike the case with your average bubble, you can actually go down to a local store and verify that this bubble is business like never before.
You just cannot take the retail operation out of the equation. It is a unique phenomenon. Others have tried, all have failed miserably. Only Apple has managed to make a success of direct retailing in this manner. This is a major driving force in Apple’s success and one good reason why Apple will continue to have a highly visible public presence.
Another factor which is always discounted is the value of the Apple eco-system. The App Store model, another unique development when it was launched, is the key to consumer loyalty. Every iPhone or iPad user invests in applications. They begin to rely on these apps and cannot do without them. Before they know it, they have a stack of cash invested in Apple’s eco-system.
The bigger this investment in apps, the greater the cost of transferring from Apple to another manufacturer, however glittersome the new devices appear. There is an incredibly high level of customer loyalty in the Apple world based on a pragmatic financial assessment of ownership.
Apple’s market share and, no doubt, profit margins will be squeezed as competitors gain strength, particularly in the still-untapped tablet market. But there is absolutely no evidence that corrections of this nature will lead to a dramatic change of Apple’s fortunes. The total market will continue to grow, Apple will continue to innovate and, with its retail network, enviable reputation and App-Store loyalty, Apple will still be a major player.
Let’s come back to that surprisingly low P/E of 13.6. This is blue-chip territory, usually reserved for steady, sensible companies that will continue to provide pedestrian returns with few nasty surprises. With tech stocks, emphasis is often on future expectations and that is why we sometimes see extraordinarily high price/earnings ratios. If we look at fundamentals, Apple truly deserves its 13.6 P/E and exhibits none of the characteristics of a traditional bubble stock. If the P/E ratio were over 100 then, no doubt, the downplayers could have a point.