Why The Economist Is Wrong on Apple

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

The well respected newspaper, The Economist, wrote an interesting article on Apple (NASDAQ: AAPL) on Jan. 29. Its main theme was that the mighty technology company will probably not crumble, but that its shares have certainly seen their peak. The newspaper provides two reasons why Apple will not return to its former self. First, Steve Jobs, Apple’s founder and creative genius is dead, and his successor, Tim Cook, has yet to prove himself capable of bringing new breakthrough products. Second, the high profit margins in the industry attract stiff competition from fierce rivals such as Samsung. This is bound to shrink Apple's share in the market over the next few years.    

A somewhat bruised apple

The Economist isn't writing such a doomsday- like piece on Apple for nothing. Shares of this mighty company have taken a strong hit over the past six months, plunging from a record $705 to $455 as of this writing. It is a whopping 35% decline. Take a look at the graph below.

<img height="150" src="http://app.quotemedia.com/quotetools/getChart?webmasterId=91022&snap=true&symbol=aapl&chscale=1y&chtype=AreaChart&chwid=284&chhig=150&chfill=ee0066CC&chfill2=110066CC&chln=0066CC&chmrg=0&chfrmon=false&chton=some" width="298" />

Why the newspaper is wrong

I believe The Economist is wrong, for the following reasons:

Innovation

Attributing the death of Jobs for the stock's decline is a fallacy. Steve Jobs died on October 2011. Following his death, shares of Apple have experienced one of their best performing times, climbing from $360 to $700 in a little less than a year. It is hard to argue that the stock market is mourning over his death when the stock sky rockets by almost 100%.

Competition

Technology is a high profit margin industry. This, in turn, attracts competition, and not only from Samsung. Apple currently competes head-to-head with Microsoft (NASDAQ: MSFT) in the PC market, and with Amazon.com (NASDAQ: AMZN) in the market for tablets. It also competes with Google (NASDAQ: GOOG) in the smartphone arena, and lately, Nokia (NYSE: NOK) also joined the party with its Lumia 920 smartphone.

But competition isn't a bad thing, and it's certainly not a sufficient reason to erase $250 billion from the company's market cap competition also means that Apple is expanding to new territories in search of new profit engines which is a very good thing.

In addition, competition alone cannot explain why Apple's shares were expensive and deserved such a trim. Shares of Apple traded at a P/E of 15x only 6 months ago (currently at 10x). Google, Microsoft and Nokia are now trading at P/Es of 24, 15 and 22, respectively. Amazon, for instance, trades at a staggering P/E of 3,000x. The same is true when you compare another value metric such as price/sales. Google, Microsoft and Amazon trade at a price/sales of 5, 3.2 and 2. This is in line with Apple's price/sales of 2.5. In other words, all of these players are now much more expensive than Apple was 6 months ago.

It's all about expectations

There is only one basic truth why the market suddenly fell out of love with Apple, and that is exuberant expectations. The market expected Apple to grow at a double digit rate, each and every year. This, of course, is unsustainable. Because fear and greed are such dominant emotions in the market, a little sense of disappointment quickly turned into aggressive selling. It has nothing to do with the business or spirit of the company; it has everything to do with the minds and emotions of investors.


shmulikarpf has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft. 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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