Quick Thoughts: Apple Doomsayers – Way Too Early is the Same as Wrong
As Apple flirts with a $500B market cap, media attention seems to have shifted from speculation on what the company might do in the post-Jobs era to scouring the company’s foundation for cracks. The New York Times seems to have taken the lead on fanning the flames of worry with the two widely circulated pieces linked above, but the usual suspects – The Wall Street Journal, CNBC, Forbes and Bloomberg amongst them – have weighed in with similar sentiments, as though gaining the top of the market cap list carried a jinx akin to a Sports Illustrated or Madden NFL cover.
Certainly the past few number ones have suffered through difficult performance after moving into the top slot – notably Cisco, whose fall from the top sliced $450B from its market cap, but GE’s cap is off more than 50% from its peak in 2004. These two have cursory similarities to Apple in that each was viewed by investors and the media with almost mythic admiration and were led to their greatness by iconic CEOs. GE offers another eerie parallel in the retirement of Jack Welch ahead of the company’s ascension to the title of the “world’s most valuable company” and the accompanying clatter about how the company might cope with the change in leadership.
I don’t really think any of this matters a bit. Regression to the mean, which is at the core of the “law of large numbers”, has never been a particularly useful strategy for technology investing. Moreover, Apple’s market capitalization, which includes $100B in cash and investments, shouldn’t raise any alarms on traditional valuation metrics either. Apple’s cash adjusted trailing P/E sits at just under 12 times with a 3 times P/S ratio, while in its most recent quarter, it posted sales growth of 73% and EPS growth of 118%. The PEG ratio against consensus expectations for 5-year sales growth is just over 0.5. In a world where IBM trades at a 15x trailing P/E and a 1.2 PEG on its 1.6% sales growth and 4.4% EPS growth and P&G carries a 19.7 trailing P/E and a 1.87 PEG on less than 4% sales growth and declining earnings, Apple’s valuation seems relatively reasonable.
The Times also raises a concern that Apple’s business might be running out of runway. Even if we restrict our view of Apple’s addressable market to the businesses in which it is already an important player, the picture is reassuring. Smartphones, accounting for 38.8% of Apple’s current sales and likely, more of its profits, are projected to grow at a 24.3% unit CAGR through 2015, with Research in Motion’s Blackberry and Nokia’s Symbian on hand to hemorrhage enough market share to buffer the iPhone from an aggressive Android ecosystem and a renewed Microsoft Windows Phone. The iPad, now 24.4% of sales, will undoubtedly see share loss from last year’s 65-70%, but the 40% annual projected market growth for tablets through 2015 again covers for that. We are pessimistic that the PC market can meet expectations for growth, but here Apple’s MacIntosh (22.2% of sales) should continue to be a substantial share gainer. These businesses are unequivocally attractive, but represent only part of the opportunity for Apple.
Easing the addressable market restriction to include other device opportunities, Apple has been long rumored to be eyeing the television business – a fresh $100B market for it to attack. Easing it a bit more, Apple’s iTunes is a $5B business that is positioned to attack the traditional multichannel distribution model for video entertainment – a $90B opportunity, just in the US and not counting advertising. Pulling in advertising, which today is a trifle for Apple, opens a $1.5 trillion market. Apple may fail to execute against these opportunity, or choose not to pursue them, but from my perspective, it has plenty of runway, even for a $500B market cap company.
The real question isn’t whether Apple is fundamentally overvalued or running out of runway, it is whether or not the company can continue to execute with the precision and panache that it demonstrated in the Jobs era. Since the roadmap for the company has likely already been established for the next year or two at the least, we are not likely to see any change in vision, culture or behavior for a while, and only time or unexpected crisis will serve to test the mettle of the Cook Administration. Until then, and maybe not even, musings about Apple and the law of large numbers seem premature.
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