Glamorous Apple

Apple Inc. (AAPL) is one of the most popular stocks followed on Wall Street.  It is a classic glamor stock.  It is followed by both institutional investors and the general public.  Apple’s highly popular iPod media players and iTunes digital media store have captured the imagination of music lovers everywhere. 

iPod NanoMany of those music lovers dabble in stocks. I’m certain many have followed Peter Lynch’s mantra, “Invest in what you know.”  These “dumb money” investors are probably what has helped propel Apple’s PE to over 40.  Many of the most recent stock buyers probably think that if iPods could bring Apple’s stock from the single digits to well over 100 that maybe the new iPhone could get APPL to 500.

Apple’s iPod helped propel its revenue growth to well over 60 percent in 2005.  That is an impressive rate of growth for a mature company that almost flat lined a few years back.  However, revenue growth at Apple is already starting to slow a bit.  This past quarter’s revenue growth has dropped to a still impressive 23% versus the same quarter a year ago.  To continue to maintain Apple’s PE of 40, the company definitely needs to find new growth from either its iPhone, increased video sales on iTunes, or increased adoption of its Mac computers.

Apple’s iPod and iTunes store combination has definitely given the company a competitive advantage.  The real question will be whether this competitive advantage is durable.  I think that Apple’s competitive advantage could last for a few more years, but any major mistakes could wipe out the excellent margins Apple currently earns in a flash.  Digital technology is changing so rapidly that it will be hard for Apple to keep up its leadership role.  Steve Jobs has done an amazing job of turning around Apple, but I’m not sure that his marketing prowess alone will be able to build a moat sufficient around Apple’s products and services to keep all its jealous competitor’s at bay.

I think Apple is a pretty amazing company with excellent products, but apparently I’m not the only one that thinks this way.  You’d be hard pressed find someone that has negative feelings towards Apple.  However, Apple’s stock is just too loved.  It does not provide any real margin of safety.  It’s fun to keep up with the lastest developments at Apple, but I’m leaving the following of this stock’s price to the traders.

Full Disclosure: I do not own shares of Apple Inc.

6 thoughts on “Glamorous Apple

  • September 24, 2007 at 6:02 am
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    Grammatical errors are usually telling marks of the ignorant — and you, sir, have lifted your hand. Go talk to a few people about Apple and the iPhone, Peter Lynch-style, before making such pathetic prognostications. Apple should indeed hit $500 in a few years.

  • September 24, 2007 at 7:55 am
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    Good summary on why Apple shares are about a third the value of RIMM on a P/S ratio and about the same as that innovative growth engine known as Microsoft. Admittedly, Apple is not a value stock as the author tends to favor. But I think what most people miss is that Apple’s OS and hardware design combination is unmatached in the areas of which it is engaged. I think you will see unprecedented Apple Desktop/Laptop growth in the PC market where it has only a 4% worldwide share. The smartphone segment is just getting started and aapl is already number one in that category and will grow aggressively in the next few years. RIMM is valued at $50B (35% of apple valuation) and yet I would posit that it is already walking dead. All Apple has to do is focus on the business enterprise side and RIMM is history as it just does not package the features in the iPhone and will not be able to in the future. You can’t just invent OS 10.X out of thin air. So its the OS that matters, so much better than Vista and its new OS Leopard is not even out yet. That OS provides the moat that no one can emulate, not Microsoft, RIMM, not Nokia. One other thing, the brand value Apple has with the 14-30 year olds is unrivaled. This demographic is Apple oriented and will shape the seismic shift in computers from MSFT to Apple over the next decade. Apple is not expensive, it is cheap, but you have to understand the real market forces acting in its favor.

  • September 24, 2007 at 8:54 am
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    This was a pretty shallow analysis- Apple’s revenue is not growing as fast because they have changed accounting this year to spread the revenue they realize from iPhone and probably iPod products to a 2 year subscription period, rather than recognizing it when the item is sold. This is a SOX compliance issue, but also should smooth out the revenue– but it means there’s a lot of revenue that they would have recognized last quarter that they aren’t recognizing now.

    Also, if you think Apple’s advantage is that its got a minor lead in technology you’re totally missing it. Apples advantage is in usability– always has been, always will be.

    Why cant’ sony make a digital walkman that people want to buy? Not because their hardware is not as technologically sophisticated enough– but because their culture results in software that nobody wants.

    And this is an area where Apple has had the lead for about 30 years– so, not only do I think they are not going to loose the usability advantage, I am not aware of any company that is even attempting to compete with them on this metric!

  • September 27, 2007 at 11:54 pm
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    Why am I not surprised to see AAPL lovers attacking this entry? Ignorant is a bliss indeed.

  • September 28, 2007 at 6:35 pm
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    Comparing P/S for Apple to either Research in Motion or Microsoft is completely bogus. Microsoft is a software company with operating margins north of 30%. Research in Motion makes a fair percentage of profit from selling subscriptions to its service and has operating margins better than 25%. Apple’s operating margin is less than 20% because it mostly sells devices rather than mostly selling ideas or services. That isn’t to say Apple isn’t a really good company–just that you can’t use price to sales ratios to compare apples to… um… other companies.

  • October 26, 2007 at 1:22 am
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    Hi,
    Its a informative post.. Yahoo! Finance reports that the average analyst estimate for Apple’s earnings growth is about 26% for the next year. I wouldn’t base my future on that, but it does provide a tinge of comfort that I’m not being scared with my numbers.There is certainly some growth left in Apple. Unfortunately, that growth doesn’t seem to be at a reasonable price, unless you think we’ll live in an Apple-dominated world in ten years

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