The power and fundamentals of Apple in the marketplace, coupled with their supersonic rise in stock price over the past few months, has made owning the blue chip company the choice for hedge fund and mutual fund investors. However, one hedge fund, who has done exhaustive valuations of price and earnings forecasts, is rejecting the herd mentality and choosing to keep its customers out of Apple due to the illogical future expectations of the company.
On March 29th, Obermeyer Asset Management presented a future valuation breakdown of Apple during their research to determine if buying the company at its current stock price was fundamentally sound. Their findings led them to decide not to join in with over 250 other hedge fund and mutual fund companies who will own the stock by the end of March, and instead attribute the Apple phenomenon to a growing bubble that will burst under its inability to meet expectations at its current price.
Given our shared appreciation for Apple as a company, why aren’t we making a place for it in client portfolios? We generally separate current and prospective investments into three broad categories: Yes, No and Too Difficult. In the case of Apple, we see this investment as Too Difficult. Let us explain:
With a market value of $550 billion, Apple now comprises 4.4% of the S&P 500 index and, all by itself, is larger than the entire utilities industry. With 932 million shares outstanding, every dollar move in Apple’s share price represents nearly $1 billion in net new capital flowing to its shares. For context, the median company size of those in the S&P 500 is $12 billion, so a 2% move in Apple’s stock is the equivalent of adding a whole new company at the median value to the index.
Since December 31st, Apple’s market value has increased by $172 billion, which is roughly the size of Johnson & Johnson, a large, well-established, innovative healthcare and consumer products company with a 125-year history. Johnson & Johnson has enjoyed many successes, has reinvested high levels of profit and is investing to expand its divisions, products and businesses. Apple attracted the same amount of investor capital in two and a half months that Johnson and Johnson attracted in its entire 125 year history.
When we look at our cash flow models, assuming Apple can maintain its current operating margins (a heroic assumption in the face of increased competition in the tablet market), to justify the current stock price, it appears to us that Apple will have to sell about $2.6 trillion worth of total products and services over the next ten years. Last year’s revenues (for the fiscal year ending 9/24/11) totaled $108 billion. If Apple’s margins shrink, it will have to sell a lot more. This level of Apple product sales will make up almost 1.5% of U.S. GDP (of course it also sells products outside of the U.S.). That means that with the average GDP per capita in the United States being around $50,000, each person must spend $750 on Apple products and services annually (since 30% of sales are domestic, this means that about $225 per U.S. citizen would go to Apple every year). Since not all 310 million people in America use Apple, those who do need to spend a lot more and the vast majority of those sales will need to be on devices because iTunes sales do not bring much profitability. – Obermeyer Asset Management
When you look at all the market fundamentals of the retail sector over the past six months, you realize that Apple now has a larger market valuation than the entire retail sector of the S&P 500 combined. In fact, in January it became the largest corporation in market value in the world, and has only enlarged that claim over the past two months as its stock price crossed over $600 a share.
As Obermeyer pointed out in their research, a 2% move in price is now equivalent to a median sized company in the retail sector, and any slight fluxuation in stock value is worth at minimum, hundreds of millions of dollars, and can easily go as high as several billion on a given move up or down.
Market analysts today are basing economic recovery on the value of the stock markets, and very few are actually seeing that the rise is being done by only a handful of companies while the rest stagnate with equal or lower expectations. President Obama and Congress have recently made Big Oil the focus of their attacks on companies they consider to be too rich, but are leaving out the massive giant known as Apple, which now dwarfs Exxon Mobil in cash, stock value, and market size.
Apple’s sustanability according to a new report from Obermeyer Asset Management is not only illogical, but doesn’t add up in an economy where every American would have to spend close to 1.5% of their annual income over a decade on Apple products just to meet the current market valuation of its stock price. This denotes that Apple’s investment has reached bubble status, and like all investment bubbles in history, the bursting can come at any time, and when most investors are unaware.