Two Signs It Might be Time to Sell Apple
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“I am shocked, shocked to find there is gambling going on in this establishment.” This famous quote from Casablanca, the epic Bogart movie, was echoed over the weekend by Apple (NASDAQ: AAPL) in reference to the two million devices they sold on the first day of the iPhone 5’s availability. The reference is not a plug for the movie – although anyone who has not seen it should. It is meant to underline the near absurdity of Apple’s indignant surprise. When a company starts to buy this far into its own hype, it may be time to get worried.
The other sign that should give investors pause is the fact that a former Federal Reserve Governor said that the release of the iPhone 5 is more likely to help the economy than the latest round of quantitative easing. While the comment was clearly hyperbole aimed at underlining just how desperate the Fed has become, and possibly how out of control, it is some evidence that Apple has become viewed as an unstoppable force. In my experience, the market has a keen way of teaching traders and companies the lesson that what goes up can easily come down.
While there is absolutely no chance that this view will not spark doubt, criticism and sheer hatred from the Apple faithful, I hope that the analysis below will give shareholders and potential shareholders something to consider heading into the end of the quarter. For the record, I like Apple. I own an iPhone. I think Steve Jobs changed the face of consumer electronics for the better. With that in mind, there is a sharp distinction between being a mindless sycophant and a prudent investor.
Shock & Awe
I am willing to allow for the remote possibility that demand for the iPhone 5 has far exceeded what Apple was expecting, but this feels uncomfortably reminiscent of past releases. Nothing creates hype faster than a product for which demand outpaces supply. Apple has gone to this well so many times that it's time someone called foul. Apple could just make more units before the launch in order to ensure that demand can be met. On the other hand, it is hard to criticize a strategy the keeps working despite its obvious simplicity.
Not only did former Fed Governor Kevin Warsh chime in on the impact of the release, J.P. Morgan Chase’s Chief Economist, Michael Feroli, asserted that sales of the new device could add between 0.25 and 0.5% to U.S. GDP this year. The statement was met by some serious skepticism, but the fact that it was made at all says two things. First, the U.S. economy is incredibly weak if a smartphone is likely to be a game changer for GDP. Secondly, when even serious financial experts are looking to Apple as a savior, the “perfection” of the situation for the company ought to be a warning sign.
Since the end of July, Apple stock has shot straight up from approximately $575 to $700, with the largest drawdown being a momentary $20 dip. While this only represents a 21% run, and the stock is still trading under a 17 multiple, advances that lack pauses should at least cause a measure of caution for shareholders. As analysts across the street are upping their price targets for the stock, and shares seem to carry a near euphoric sheen, the company is not without risk or competition. It is the drop you do not see coming that hurts the most when you fall.
If we can take for granted that Apple is a great company, perhaps looking at the reality of the marketplace might be possible. Google (NASDAQ: GOOG) did not see the sales numbers of the iPhone 5 and exit the market. Microsoft (NASDAQ: MSFT) did see records broken and decide to cancel the release of Windows 8 or the Microsoft Surface. Samsung has not decided that its loss in patent court and big numbers for the iPhone 5 mean it should stop competing.
As Apple and each of its competitors make a push into markets outside the U.S., the growth potential is significant. China alone could be a game changer for Apple, Google or any company that can make serious inroads with China Mobile (NYSE: CHL). Apple looks to be the frontrunner, working on a deal with the provider, but the Chinese government is the grand equalizer. If this materializes in the first quarter of 2013, then jump in on the news, but for now, take a breath.
Perhaps this view is too contrarian, but with the number of near-perfect catalysts buzzing around Apple, it seems like someone needs to say something. Apple has a bright future, but blindly chasing hype is how bubbles form and burst, not how prudent investors drive solid returns. If you are considering Apple, or already own shares, be realistic, vigilant and aware- Apple is a great company, not the second coming.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, China Mobile, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.