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Mar 20, 2012

Barnstorming Apple's iBubble will eventually go iPop

Nasdaq, the US stockmarket that houses tech stocks such as Apple, has already recognised the wealth dangers from Apple's soaring share price.

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There are people who chase tornadoes, spot trains and jetliners, and forecast investment bubbles: some for the thrill of the chase, others for science, or in the case of those bubbles, for some sort of vindication or the right to say “spotted it first”.

US analysts, excitable writers from Bloomberg, Reuters, the Financial Times, The Wall Street Journal and The New York Times are constantly on the lookout for bubbles. It’s an affliction that has taken hold in the UK and in Australia (home price bubble, anyone?), with writers on The Australian, the Fairfax papers and websites such as Business Spectator madly bubbling away, chasing and naming the next bubble that not only threatens our economic well-being, but could be the next subprime crisis.

But many of the American bubblistas had shown themselves selective in their pursuit and may have missed one that has developed under their very noses: the shares of tech giant Apple. It’s starting to get frightening.

I’m not the first to point out the worries around the Apple share price, which rose 2.6% overnight to a  record $US601.10 in trading ($US601.80 after hours), after the company announced its a $US45 billion three-year buyback and a quarterly dividend of $US2.65 a share, giving a dividend yield of 1.8%. That will be paid in July.

So what are the metrics for the Apple bubble? Well the shares are up 48% so far this year and 8.9% in the past five trading days on US markets. It has been the surge this year that has been bubble-like. Since March last year, Apple shares are up 81%, so well over half that rise has happened in the first 10 weeks of this year, which is mad.

It is the second time  Apple shares have topped the $US600 in the past week. Now, after the dividend and buyback announcement, talk is of $US700 (Goldman Sachs this morning, hopping onto the bandwagon and ignoring the “irrational exuberance“. The company is the biggest in the world by market cap at just over half a trillion dollars at the closing price this morning.

Nasdaq, the US stockmarket that houses tech stocks such as Apple, has already recognised the wealth dangers from Apple’s soaring share price and last year moved to try and reduce those dangers by cutting the weighting Apple shares had in a key Nasdaq 100 index.

In April last year, the exchange cut its weighting to 12.3% from 20.5%, when the shares had hit $US350. But that was to no avail. The price has risen so far and so fast that it has pushed its weighting back up and Apple now accounts for 19% of the index. Now this index of 100 well-known companies is  hostage to the performance of a few technology titans such as Apple and in fact the entire US market is hostage to Apple and needs its current stellar performance to continue for a long time to justify current levels.

Apple is certainly going gangbusters; sales are strong, cash flow is booming, as are earnings. In the conference call overnight to announce the buyback and dividend, CEO Tim Cook let slip that the company had a record weekend for iPad sales (the new iPad was released in 10 countries on Friday night, our time). Apple later said that record was in fact 3 million iPads, which at the basic price, was worth about $US1.5 billion.

That’s helping the company coin the cash, so to speak. The company’s executives said in the conference call that in the 2011 financial year its cash reserves rose $USS31 billion, with $US24 billion of that growth coming from abroad. In the first quarter of fiscal 2012, another $US16 billion was generated, leaving Apple with $US98 billion at December 31, with $US64 billion now outside the US.

Apple, like so many US companies, won’t bring that cash back because it won’t pay taxes on it when it is repatriated. The $US10 billion a year in buyback will be financed solely out of US cash holdings and cash flow, as will the $US2.65 a share in quarterly dividends. That still won’t put a dent in the cash. But the end of this year, much of the domestic cash reserves and cash flow will have been used by the buyback and dividend payments. But Apple could have close to $US100 billion in offshore cash reserves by this time next year!

That’s impressive, and it’s no wonder Apple has helped pull the entire US market higher, from the Dow to the Standard & Poor’s 500, which at the close this morning was less than 10% below its all-time high reached in 2007. That was 1565.15 in October 2007. You’d have to wonder how much of the current market surge in the US is due to the increased confidence in the economy and how much has been driven by the good times at Apple and other US stock companies (imagine what will happen when Facebook eventually sees its shares listed).

Nasdaq (the composite index not the 100) topped the 3000-point mark for the first time since the tech crash. but Nasdaq still has a way to go before reaching its all time pre-tech wreck high of 5048 points.

That growth in Apple shares can’t continue forever. Apple has to stumble, like all former high fliers have done over the years, from IBM to Microsoft, to ITT, Goldman Sachs, to Apple in a past life (pre-1995, which it last paid a dividend). Booms and bubbles always end in tears (tech wreck anyone?) Are the vibes familiar to anyone who can remember back 12 years, to pre-Google and Facebook days (and pre-iPad and iPhone)?

I’ve got no idea when the bubble will pop around Apple and tech shares in the US, but pop it will go. Watch the yields on US government bonds: they ended at 2.38% last night for 10-year securities, the highest they have been in seven months. If they hit 3% and go higher, that might be enough to pop this bubble, but who knows? You could make the case that the Apple boom has been greased by the two fiscal easings in the US (plus others in Britain, Japan and Europe). If you can borrow millions of pennies (minimal cost) and hop into Apple and make 8-9% in a trading week, why not do it? It’s happened in oil, gold and other markets (US bonds in the sovereign, corporate and junk).

So just watch for the boosters and urgers appear to argue that ‘This time its different”. They always do, but it never is. The exuberance is always irrational at the end.

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9 comments

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9 thoughts on “Barnstorming Apple’s iBubble will eventually go iPop

  1. michael r james

    Tx, Jason. Crikey’s systems are really zany these days.

    Some analysts are comparing the iPad with the Kindle Fire but it is a totally independent niche, IMO. Amazon can sell it at a loss but I seriously doubt it is a long-lived product or market–because the full-functioned Tablets will converge on it. The main things going for the Fire are its price and optimization for e-books; in fact because it is no longer an b/w e-ink screen it has lost earlier versions claimed advantages, namely readability for long times without eye fatigue (so they say, I always thought this was a bit over-rated and so Amazon seems to agree now) and v. long battery life. Of course slow response of e-ink meant it was useless for video even if discounting b/w.

    No, the iPad is THE display device for consumption of media etc and display of one’s own stuff. A lot of Kindle owners will end up as iPad owners, not the other way around. I don’t own either but since I do not want to be lumbered with multiple devices I would go for the iPad rather than a Kindle if I want an e-reader. With its retina display I presume it will be even easier for the eyes.

  2. Jason Singh

    @Malcolm. I reckon the Tablet war is over. Sure Kindle Fire will take a good chunk, albeit of a slightly different market, but there are plenty of Tablet makers who are already looking wobbly. The strength with Apple is that not only are more and more people buying an Apple (at an astonishing rate) and as Michael said, the growth in China etc is very strong, but people who own one will upgrade. So you are getting growth from new buyers and existing buyers upgrading. It works a treat with the iPhone and I cannot see that changing with the iPad.

  3. Jason Singh

    Apologies Michael, didn’t see your comment was at the top.

  4. Jason Singh

    Not sure what is going on – but ‘michael r james’ left a comment but it isn’t showing up – but I’ll re-post it from my email:

    Author: michael r james
    Comment:
    Timing is everything. There is a strong case for Apple’s continued profitability (which is not necessarily a predictor of share price but..). Below is an interesting article and with several hundred comments. Manjoo (who is a tech expert not a stock expert) is essentially analysing Apple’s market and the effective lack of competition in its best selling areas, and the potential to significantly increase its market share (eg. only 5% in total mobile phone market leaving huge upside).

    [(slate.com/articles/technology/technology/2012/02/why_apple_stock_is_still_a_great_buy_at_500_a_share_.html)
    Apple’s Stock Is a Bargain
    The company hasn’t peaked—huge growth lies ahead.
    By Farhad Manjoo | Posted Wednesday, Feb. 15, 2012, at 6:27 PM ET]

    Actually Farhad Manjoo did not mention one of the main reasons Apples near-term future is extraordinarily rosy. Tim Cook did discuss it clearly in his presentation in February: it is the growing overseas markets, mostly the BRIICs. The trend in some of these countries is phenomenal, and it is only just beginning. With iPhone and iPads the almost guaranteed results in this market is probably difficult for analysts to get their head around. I cannot remember which one (possibly China itself where the iPad until now has not been for sale) but profits went from 1 billion to 13 billion last year.
    The current year’s prediction is another $50 billion added to its existing cash pile, which the buy-backs and dividends will hardly touch.

    So in the medium term I reckon Farhad is right. In the long term we’re all dead.

  5. Malcolm Street

    Jason – Apple currently dominates the Tablet market, but as usual when a company creates a juicy new market others want a piece of the action. There’s both Android tablets (with Apple suing to stop the Samsung Galaxy) and the new Ultrabooks competing now.

  6. Jason Singh

    It is easy to look at the appreciation in the share price in Apple recently and think it’s a bubble and that it just doesn’t make sense until you start looking at how much money they are making and the rate at which they are making it is increasing every year. Apple’s current price is 17 x their earnings for the last year and only 12 x their forecast forward earnings. Comparing that to the other behemoth tech companies like Google (Trailing P/E: 21.30, Forward P/E: 12.78) and Amazon (Trailing P/E: 135.4, Forward P/E: 70) and it doesn’t look so silly, especially since Apple has completely taken control of the Tablet market. All of this doesn’t mean Apple cannot have issues further down the line, but right now, given basic fundamentals and their market domination and growth prospects in the short to medium term, I’m more than happy to own Apple shares.

  7. Richard Wingfield

    Whoops – daringfireball.net

  8. Richard Wingfield

    Oh dear! Lessons from history? Is not the lesson this … that history both does and DOESN’T repeat itself? History is replete with one offs. For a more informed view have a look here asymco.com and here daringfireball.com.

  9. michael r james

    Timing is everything. There is a strong case for Apple’s continued profitability (which is not necessarily a predictor of share price but..). Below is an interesting article and with several hundred comments. Manjoo (who is a tech expert not a stock expert) is essentially analysing Apple’s market and the effective lack of competition in its best selling areas, and the potential to significantly increase its market share (eg. only 5% in total mobile phone market leaving huge upside).

    [(slate.com/articles/technology/technology/2012/02/why_apple_stock_is_still_a_great_buy_at_500_a_share_.html)
    Apple’s Stock Is a Bargain
    The company hasn’t peaked—huge growth lies ahead.
    By Farhad Manjoo | Posted Wednesday, Feb. 15, 2012, at 6:27 PM ET]

    Actually Farhad Manjoo did not mention one of the main reasons Apples near-term future is extraordinarily rosy. Tim Cook did discuss it clearly in his presentation in February: it is the growing overseas markets, mostly the BRIICs. The trend in some of these countries is phenomenal, and it is only just beginning. With iPhone and iPads the almost guaranteed results in this market is probably difficult for analysts to get their head around. I cannot remember which one (possibly China itself where the iPad until now has not been for sale) but profits went from 1 billion to 13 billion last year.
    The current year’s prediction is another $50 billion added to its existing cash pile, which the buy-backs and dividends will hardly touch.

    So in the medium term I reckon Farhad is right. In the long term we’re all dead.

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