So investors now believe that Apple is more valuable than GE, Proctor & Gamble, Johnson & Johnson and JP Morgan. This is evidenced by its market capitalization of over $200 billion. All of these other companies trade at a sub-$200 billion level. However, each on of these other companies earns more in net profits than Apple hence it trades at a higher price-to-earnings multiple:
This begs the question, ‘does Apple deserve a premium valuation in comparison to the best consumer, industrial and financial brands in the world?’ Based on recent history the answer is no doubt, ‘yes.’ The iPod followed by the iPhone were both revolutionary products that created tremendous growth at the company even amidst one of the worst recessions in a long time.
However, looking into the future it’s hard to imagine Apple’s amazing growth being sustained. Apple is now the 4th largest company in the world by market capitalization. The law of large numbers suggests that this fact alone makes it exponentially more difficult for Apple to continue to grow.
Indeed, the iPhone is maturing and new competition from the likes of Google’s Android and Chrome operating systems is already eating into the company’s flagship product. So what will be the next iPhone-like product to fuel the company’s future growth phase?
There is much fanfare surrounding the iPad, the company’s latest venture but there are two things that I believe will prevent this product from becoming the second coming of the iPhone.
First, the iPad is not a totally new product line for the company. To me it seems like it’s trying to replace either your iPhone or your laptop (aside from the fanboys, who will buy all three?) In that case, the iPad will probably cannibalize the sales of other Apple products rather than it’s competitors’ products.
Second, like the iPhone the iPad is a large step further into the world of closed computing where consumers are locked into Apple everything. Consumers want choice and Apple is simply not giving consumers what they want. This also alienates third party developers who typically play a large role in the success of a product like this.
Apple will no doubt continue to be a great consumer technology company but if the iPad does not at least help sustain the amazing growth that the company has seen in the recent path the premium stock market valuation will no longer be justified.
So that’s the fundamental case for selling Apple in a nutshell. And it may have something to do with the company’s top brass selling 1 million shares (the majority of their actionable holdings) last week.
Looking at the charts, there are also signs that Apple’s amazing run may be coming to an end. Divergences on the daily, weekly and monthly charts suggest that the stock price momentum may be faltering at the same time the company’s growth may begin to slow:
Looking past the divergences, it’s obvious the stock has been on a tear over the past few years. While most tech stocks are lucky to be battling their bubble highs made back in 2000, Apple currently trades six times higher than its 2000 high.
And sentiment has soared right along with the stock. Analysts are uniformly bullish with fully 36 ‘buy’ or ‘strong buy’ ratings. Individual investors are also nearly as bullish sending a clear contrarian signal.
All in all, there are a lot signals, fundamental, technical, insiders and sentiment, flashing yellow lights here. Put together they may even shine a red light for the stock price.
Disclosure: short AAPL
All the usual disclaimers apply doubly here: this is not a recommendation. It is intended only as food for thought. Individual investors should not sell short at all; leave that to professionals like me who are much better at losing money.