27th September 2012
The shares are up 67% over one year, but there appear to be a number of threats to its standing.
Are investors about to fall out of love with Apple?
This week has brought some problems for the group. There is a potential threat to its supply chain from riots at the Foxconn factory in China. Under pressure from Apple and other groups, Foxconn has sought to improve conditions in its factories in recent years after a spate of suicides drew unwelcome attention. Despite these improvements, thousands of workers still work long hours in military style conditions and this has led to sporadic uprisings, as seen this week:
"Security teams wearing riot helmets and wielding plastic shields marched around a Foxconn Technology Group factory in northern China in a sign that tensions remain high after a fight between 2,000 workers halted production."
This does not appear to have troubled markets excessively – perhaps reasoning that there are always alternative suppliers – but they have been concerned about weaker take-up of the iPhone 5. The shares have under-performed the S&P 500 index since the market started to slide on Tuesday:
"Apple (AAPL) shares were off 2.12% to $685.22 after the company announced it sold 5 million iPhone 5s this weekend, which disappointed some on Wall Street. There were several analysts, including Piper Jaffray's Gene Munster who were expecting millions more.
"Sterne Agee's Shaw Wu had a different perspective on the number, saying the sell side's estimates were out of line: "We are not overly concerned with this 'disappointing' number as we believe this is a classic case of near-term expectations getting out of touch with reality. We find it unfortunate that some analysts continue to publish irresponsible estimates without taking into account realistic demand trends and potential supply constraints on new in-cell touchscreens." Wu has a buy rating on Apple with a $840 price target."
There has also been criticism of some of Apple's functionality. For example, its map app: "Inaccuracies and misplaced towns and cities in Apple's new map software have provoked anger from users. In June Apple announced it would stop using Google Maps in favour of its own system, created using data from navigation firm."
This is only a small part of the Apple offering, but it does suggest some fallibility.
The Apple bubble
Apple's financial metrics do not look excessive for those who may remember the giddy days of the technology bubble. It has a market capitalisation of $623.54bn. It trades on 16x earnings (source: FT). It even has a yield – just 1.57% admittedly, but unusual for a technology company. It has cash on its balance sheet and strong earnings. There are no ‘blue sky' valuations here.
The question is really whether it can sustain the earnings on which its valuation is based. Gary Robinson, fund manager at Baillie Gifford, says: "The biggest misconception about Apple is that it is a hardware business. It is a software business." He believes that Apple has built an ecosystem, which has driven customer loyalty and this eco-system is expanding through iCloud and new Apps. Re-purchasing rates are strong and the company continues to grow much more quickly than the market. He says that he would worry if Apple was at a 50-100% premium to the wider market, but until then he is comfortable with his holding.
Underperforming the market
There is one other thing to bear in mind, however. The current market climate has driven investors to prioritise quality companies with high visibility of earnings. Apple certainly fits this category. Some, more value-focused, fund managers have warned that investors risk over-paying for these quality stocks, some of which have been in a ‘stealth bear market'. If the market turns – QE starts to have an effect, or growth picks up in the US – and risk appetite returns, these quality companies may underperform the market.
Apple may inspire devotion among its followers, but the stock market is more realistic. The pitfalls for Apple appear to be well-flagged. However, it is at risk if the market – for whatever reason – decides that it no longer wants to pay a high price for visible growth.
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