Apple Likely to Move Sideways before Breaking Out

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently Jefferies has cut Apple's (NASDAQ: AAPL) stock price target to $800 from $900. Noted Apple bull Peter Misek of Jefferies believes Apple's growth will start to slow down in 2014, as the market becomes saturated with its products. He believes Apple will launch the iPhone 5S in June or July, compared to the September and October launches for the iPhone 5 and iPhone 4S, respectively.

Even though Apple may push up the iPhone 5S launch, which would boost earnings per share for fiscal 2013, Misek mentioned that very early 2014 iPhone build plans indicate a deceleration in growth to around 20% as the market becomes saturated.

While Jefferies is still bullish on Apple with a price target of $800 on its stock, I don't think that target will be achieved any time soon. $800 is certainly possible, but a prolonged consolidation may be in the cards before that.

Apple's Revenue, Operating Margin and Free Cash Flow

Apple's revenue continues to be impressive, but its operating margin has started deteriorating. Apple's rising SG&A expenses are causing compression of operating margins. FCF (free cash flow) growth has started falling since the beginning of 2012, something that hasn't happened in the last five years.

AAPL Revenue Per Share TTM data by YCharts

Apple's Expenses and ROIC

Escalating SG&A expenses can be a serious problem for Apple. Reported on the income statement, SG&A expenses equal the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. Along with declining operating margins, Apple's ROIC (return on invested capital) will no longer be a source of cash generation in the near future. This will negatively impact Apple's bottom-line and earnings per share, even as revenue continues to grow.

AAPL SG&A Expense TTM data by YCharts

Apple's Tangible Book Value Per Share and PTBV

Tangible book value per share is one of the financial ratios used to measure a stock's true value. It is an imperfect measurement, but a reasonable assessment of what shareholders might receive for a share if the company were liquidated. Tangible book value is the value of the company's material assets after its liabilities and the value of its intangible assets have been deducted. It is an imperfect measurement because the selling price of material assets probably will not match the recorded value.

Since 2009 Apple's stock price and PTBV (price to tangible book value per share) has been maintaining an interesting correlation. As soon as the PTBV ratio approaches 6, the stock price corrects.

Despite having an impressive tangible book value with loads of cash, the market is not willing to pay any premium for its shares. As a result the PTBV has started declining, due to a correction in the stock price. However, the market could change its mind if the FCF and ROIC start improving. As the PTBV approaches the lower end of the range, the stock price is expected to rebound. But that doesn’t mean it will create another new high shortly. Actually, the stock price is expected to reach the higher end of its range.

AAPL Tangible Book Value Per Share data by YCharts

Comparing Apple with Google

Now let's compare Apple's current position with Google (NASDAQ: GOOG). Google had a similar position in 2010, when its operating margin was peaking. With tangible book value per share remaining quite impressive, the PTBV started to fall. The stock witnessed a prolonged consolidation phase since then, before breaking out recently in 2012. Google's PTBV has also been hovering in a tight range since then, after peaking at the beginning of 2010.

GOOG Operating Margin TTM data by YCharts

The Bottom Line

With Apple's FCF and ROIC deteriorating, its stock price movement should replicate that of Google since 2010. This implies Apple's stock is expected to move sideways before breaking out on the upside. 


Anindya7 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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