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Apple: When Is It Over?

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

"A good hockey player plays where the puck is.  A great hockey player plays where the puck is going to be."

-Wayne Gretzky

I think that hockey fans and the hockey clueless alike can appreciate that statement from Wayne Gretzky (He was a hockey player...kind of the Michael Jordan of hockey if you will...)  To be good at hockey, you need to be where the puck is.  But if you're going to be great, you've got to know where it is going before it gets there.  The same applies to investors.  If you are going to be great, you have to know where a company is heading before they get there.

A question that often plagues investors is knowing when a company is done.  By done, I don't mean cease to exist as a company.  There are many companies out there still doing business, but done as for as our purposes go.  By done, I mean when do you know when a company has ceased to be great, and has settled for good?

I know of no magic eight ball, soothsayer, prophetic treatise, or park bench drunk who can give me a satisfactory answer to this question.  There is only one source that I can consult:  history.  The stock market is littered with the empty corpses of great companies.  They are still there in body, but their souls left them long ago.  What can these companies teach us about when to sell and move on from a company?

Specifically Apple

I want to know when a company is done, because I want to know if Apple (NASDAQ: AAPL) is done.  I have heard many arguments that Apple is no longer a good investment.  Here are a couple of my favorite reasons I've heard to sell Apple:

  1. What goes up must come down
  2. Apple already has a market cap over $500 Billion
  3. Apple is done...
  4. Apple is not as cool as it once was
  5. And more answers like these

Number three is my favorite.  I have read arguments that Apple was done, where the author simply stated that Apple was done.  It's a pretty water-tight argument.

None of the reasons above give us any concrete reason to believe Apple is done.  

<img src="http://media.ycharts.com/charts/c26e71485eb36837e829099499e688d9.png" />

AAPL data by YCharts

Apple has had one of the greatest ten year runs of all time.  Given its history, I want to know what the next ten years hold.  Are we soaring to new heights, or crashing?

An Appeal To History 

If we take a look at former market darlings who have fallen from grace, and then analyze why, I think we will be able to better answer if Apple is done.

Yahoo (NASDAQ: YHOO) richly rewarded it's investors who invested for $0.03/share in the 1990's.  Of course, Yahoo was part of the tech bubble of 2000, and had a big pop.  But by 2005 they had recovered much of what was lost in the crash.  Shares were up big time.  But from 2005 on, the stock has gone nowhere but down.  What happened?  Google happened.

Believe or not, Bank of America (NYSE: BAC) could be considered a market darling at one time.  From 1997 to 2007, the stock was up over 600%.  What was Bank of America doing during that time?  Simply put, they were growing.  They acquired several financial companies such as FleetBoston, Banco Itaú, and MBNA.  Things were going good and growing good, until 2007.  A string of bad investments devastated BoA.  Most notably, perhaps the Merrill Lynch acquisition and the surprise $21.5 Billion quarterly loss that came with that.  This has seen shares deteriorate from the once high in the $50's, to where we stand today around $10.

Netflix (NASDAQ: NFLX) is also a market darling ghost of investing past.  People who got in in 2002 and rode the gravy train until mid-2011 saw returns of over 6,000%.  Everything seemed to be going right for Netflix.  But before the end of 2011, Netflix's stock had declined 75%.  What went wrong here?  Two things:  First was a very high P/E ratio around 80.  That's hard to justify for any company.  Secondly, Netflix angered their customers.  A price increase and poorly handled spin-off dvd business had consumers heading for the doors.  It's hard to imagine what could have happened if Netflix actually had a decent rival company at the time.

And Apple?

I'm sure that we could come up with more stories, but what have we seen so far?  

  • Not keeping up with competitors matters
  • Bad acquisitions hurt
  • High P/E ratios are only allowed for so long
  • Customers are priority

What can we say about Apple?  The last three don't apply.  Apple is not making any poor acquisition decisions right now.  Most development is in-house.  Their P/E ratio, in my opinion, is laughably low at 12.05.  What about the customers?  The debate will rage I'm sure, but it's hard to find customer complaints.  Apple has some of the most loyal customers in the world.  Why are they so loyal?  Simple.  Apple generally gives them what they want.

The only argument here that deserves a deeper analysis is the question "Is Apple keeping up with competitors?"  Several people would point to companies like Samsung, Amazon, and Nokia and say they are stealing Apple's thunder.  I'm not sure yet if this argument is valid, but it's worth a deeper look.  If true, then there may be merit to the Apple bear argument.

Conclusion

While it's worth a deeper look, I have not seen anything yet that would indicate that Apple is done as a company or an investment.  Rather, I see the opposite.  This company is still on it's ascent.


thequast owns shares of Bank of America. The Motley Fool owns shares of Apple, Bank of America, and Netflix. Motley Fool newsletter services recommend Apple and Netflix. 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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