Wednesday, March 21, 2012

Is Apple a Buy?

Apple Inc. (AAPL) is the most talked about stock in the market today. It recently broke above $600 per share and it is setting new highs almost on a daily basis. In response, analysts are outdoing one another by raising their price targets. They argue that at just 17 times trailing earnings, and 14 times expected 2012 earnings, AAPL is still a cheap stock. Indeed, AAPL does offer more value than many other highfliers. For example, Lululemon Athletica (LULU), an apparel maker, generates just a fraction of the sales that AAPL produces, yet LULU is selling for 65 times trailing earnings and 60 times expected earnings. So what gives?

One reason why AAPL looks comparatively cheap is because it is so huge. With a market cap of $565 billion, it is the largest stock in the S&P 500 Index by far. In fact, it is 35% larger than the second-largest stock (Exxon Mobil). Investors simply cannot get their minds around a company this big being able to generate the kind of growth typically seem only in small-cap companies. APPL's revenues were up 14% in 2009 then they surged 52% in 2010 and 66% in 2011. Over the past four quarters, sales are up 68%. In other words, despite the company's already gigantic size, revenue growth is still accelerating. One could reasonably argue that there is still plenty of room for growth, especially in international markets. Imagine, for example, how much larger AAPL could get once it establishes a real foothold in China.

Another problem has to with skepticism about the company's ability to continue coming out with revolutionary must-have products--especially now that its co-founder and inspiration, Steve Jobs, has passed away. The stereotypical AAPL customer is young and extremely passionate about the company's products. I personally know a few who live in my house. They refuse to consider buying any competing products. These kinds of customers don't really care if iPhones drop calls or iPads overheat. If APPL builds something, these consumers will run, not walk, to the nearest store. But how long can AAPL count on this lemming-like behavior? How long will customers leap every time the company announces a new product? AAPL depends heavily on exactly the kinds of customers who are also the most fickle. Do something that really upsets them and they will abandon you in a second. And you can bet that the competition is not sitting still. They haven't had much success so far, but competitors are doing their best to try to beat AAPL at its game. Indeed, the next hot gadget may come from a company we haven't even heard of yet.

So is AAPL a buy? I have been around long enough to know that momentum can take any stock much higher--or much lower--than you could possibly imagine. Right now, upside momentum is clearly on AAPL's side. Take a look at the price chart and you will see that for three straight years, AAPL shares increased at a fairly steady rate. However, starting about three months ago, the gains suddenly accelerated. It's a bit like watching Usain Bolt running at full speed unexpectedly shifting into a faster gear. Therefore, I would not be surprised to see this stock go higher, but that's not a bet I'm willing to make. I simply find it impossible to believe that the world's largest company can maintain annual revenue growth rates of 65% for much longer.