Is Apple’s Market Cap a Bubble?

Image result for apple product lineup 2015 Apple’s progression over the past decade has been truly impressive. The company has defied all odds and has relentlessly continued on its trajectory of staggering growth. The most highly-valued company since January 2012, Apple hit an unprecedented market capitalization of $775 billion on February 23, 2015. That day, Exxon Mobil’s valuation was $371 billion, making Apple more than double the size of the second largest publicly-traded company. As it gets ready this month to release its wearable device, Apple Watch, Cantor Fitzgerald is projecting that Apple’s valuation will hit $1 trillion.

During the quarter ending December 2014, Apple posted record quarterly revenue of $74.6 billion and record quarterly net profit of $18 billion. Sales outside the U.S. accounted for 65 percent of the quarter’s revenue. These results were fueled by all-time record revenue from iPhone and Mac sales as well as record performance of the App Store. With 74.5 million units sold in the quarter, iPhone set a new record in terms of units sold. Apple had massive reserves of $178 billion.

Apple’s performance in the quarter ending December was a déjà vu of sorts, mirroring its performance in the last quarter of 2011 when the company had set an all-time quarterly record for the sale of its iPhone, iPad and Mac devices. This record, announced on January 24, 2012, pushed Apple’s stock price to $454.50, and gave Apple a market capitalization of $423 billion. By topping Exxon Mobil‘s $417 billion market cap, Apple became the most valued publicly-traded company. For its fiscal year 2011, Apple had cash and marketable securities worth $82 billion.

To retain its standing as the largest-ever company, Apple needs to address some serious issues which could pull its stock down. One of them is its pricey products. The Economist quotes a stockbroker as saying that the higher than average selling prices increasingly make Apple a niche player, somewhat like a luxury-goods firm.

In a blog on January 25, 2012, we questioned the sustainability of Apple’s business model. What we saw as a problem for Apple was the limited line-up of its products. For a company its size, we contended, Apple should have a much larger product portfolio addressing a wider range of market segments. A bigger portfolio, we reasoned, will allow Apple to diversify its risks, giving greater stability to its stock price.

Notwithstanding our ominous concern for Apple’s stock price, it continued its upswing and shot well above the $600 mark in less than three months.(On June 9, 2014, Apple’s stock was split 7 for 1 split, meaning that for each share of Apple pre-split, the shareholder owned 7 shares.)

It is true that Apple has been trying to expand its repertoire. Since 2013, it has been moving beyond just hardware into the realm of software and services. The Economist says that if Apple were simply a hardware-maker, there would be reason to worry. iPad sales have weakened and the iPhone still generates more than half of the firm’s revenues, and the magazine expresses concern over the fact that Apple is losing market share to rivals.

In a positive sign, however, Apple is trying to become more open to partners—a big change for the firm, as the Economist points out. “Apple’s future will be less about hardware and more about its ‘ecosystem’—a combination of software, services, data and a plethora of partners.” The Economist rightly contends that Apple’s opening-up may need to go further, to keep up with Google’s ecosystem.

A large part of Apple’s attraction has been the “coolness” of its products, distinguishing them from Google and Amazon offerings. Seeking Alpha refers to a survey of high school and college students about their views on tech products. Conducted by Chegg, Inc., the survey found that the coolness of products from Apple is fading and is being replaced by a “too-cool-for-school” judgment, causing the students to veer away from buying Apple devices.

Market Analyst™ believes that Apple needs to make a serious pivot before its luck starts to run out. In the past, the company has seen bumps in its growth but it has rebounded with renewed vigor. However, Apple has to be cognizant of historical trends in stock prices and how companies have risen and fallen. There are several examples of these companies but the biggest one is Apple’s own history when at one point after a meteoric rise it was struggling on the verge of bankruptcy.

In an article in Forbes magazine in March 2012, Eric Jackson made a stunning statement. No company this big, he declared, has ever had the opportunities and relatively low market share that Apple now has (emphasis added). The burning question is whether Apple will exploit the opportunities presented to it and solidify its position as the world’s largest company, or whether it will let these opportunities slip by.

While Apple deserves a lot of credit for its singular achievements, we stand by what we wrote in 2012. Apple’s business model is not sustainable over the long run. Is Apple’s market cap a bubble? Maybe not right now, but Apple needs to lift the blinders before it is too late.

In the ultimate analysis, stock trading is a game of meeting expectations. To Apple’s credit, it has so far met or exceeded expectations. In the quarter ending December, a major factor in exceeding expectations was a 70 percent increase in iPhone sales in China. Can Apple keep such a record quarter after quarter? While that is possible, it is obviously not a certainty. Due to its slim product line up, if Apple’s stock takes a tumble, recovery will not be a piece of cake.

Apple must go on a multi-billion dollar buying spree, not just acquiring companies that will complement its product line vertically but to expand horizontally into new markets. It biggest acquisition so far has been Beats Electronics, made in August 2014, for which it paid a not-so-hefty $3 billion. Apple needs to make even bigger acquisitions that can serve as a cushion if its traditional business suffers any setbacks.

With a huge reservoir of cash at its disposal, Apple has the potential to become truly big – a dominant player on the global scene. Unfortunately, Apple is not even trying.

Blogger: Naqi Jaffery

© 2015 Market Analyst, LLC. All rights reserved.

3 Responses

  1. Reblogged this on samarsmusings and commented:
    Spot on! Apple really needs to pull up their socks in order to maintain the current position it enjoys. They need more & reasonably priced products added to their portfolio or they’d be soon taken over by their competition.

  2. Spot on! Apple really needs to pull up their socks in order to maintain the current position it enjoys. They need more & reasonably priced products added to their portfolio or they’d be soon taken over by their competition.

  3. Spot on! Apple really needs to pull up its socks in order to maintain its position as a market leader. It needs to add more products in its portfolio and its overpriced products cannot be seen as luxury, when competitors such as Samsung and Google are offering the same product at much affordable prices

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