Should You Take a Bite into Apple?

A Bite Into AppleOver the last year I saw a few articles and posts around the web with the big question, “Will Apple Pay a Dividend?”  Back then Apple was around $325 USD per share. Coincidentally on March 19th, the very day Apple (AAPL) announced their dividend, staff writer Hank Coleman asked the question why  Dividend Fund Managers Are Buying Apple? Apple’s new dividend has been a blessing in disguise, since the dividend now comes along with a hefty share price. Regardless of whether you love Apple products or not, or view Apple as a leading and profitable company for years to come, the real question is whether the momentum and current share price is sustainable.

It’s an important question. As the Canadian Couch Potato recently pointed out in is article, Apple and the Dividend Puzzle, Apple shares now make up 4.5% of the S&P 500 Index.  So if you are investing in U.S. index funds or mutual funds, then the long term outlook for Apple directly impacts your portfolio. Even if you don’t own AAPL stock directly, the long term consequences for a crashing AAPL share price (should that happen) would send ripples throughout world markets, pension funds, and any other technology or telecom stocks you own.

Is Apple Overvalued?

The answer depends who you ask. Many investors both retail and institutional believe that Apple is undervalued in terms of its fundamentals, cash flow, and balance sheet. Whereas other investors look to the soaring share price, now at $607 USD as dangerously high, especially with its recent run up in price. I honestly have no idea whether Apple is overvalued or not. What I do know is when you hear hype like “this stock is going to $1000”, you can be sure the top is close. Even if Apple does go to $1000 per share, would that price be sustainable?

If you are already an owner of Apple stock then you are doing very well indeed, and it may be a prudent time to take some profit off the table. In a recent video on the Globe & Mail, Five Reasons I’m Not Buying Apple, columnist John Heinzl feels Apple is overvalued and outlines his reasons.

Tech Has a Short Lifecycle   

History tells us that most high flyers eventually run out of steam, especially in the tech industry. The dot com bubble in the early 2000’s was a classic bubble. Strong blue chip giants like Cisco, JDS Uniphase, and Nortel all had stellar earnings reports and cash flow. Tech was in high demand, and these giants were all caught along for the ride in the dot com bubble.

RIM’s BlackBerry 850 and 857 were introduced in 2003, less than four years before the iPhone debuted in July 2007 and changed everything. Although RIM’s BlackBerry Bold was a winning phone, RIM began to lose market share to the Apple iPhone. RIM shares were trading at an all time high of $148 per share on June 19th 2008 and at another high of $142.75 on August 7th 2008. Today, Research in Motion (RIM) shares are trading at a tenth of their former value, with worldwide declining sales.

The rise of the iPhone pummelled RIM, and placed Palm in receivership. Nokia the pioneer of the cell phone is currently struggling for its very survival in an iPhone and Android world. Today Android is the mobile platform of the day, and is already taking a big bite into Apple’s dominance. In less than five years since the debut of the iPhone, we have seen enormous shifts with tech companies, including the rise of Samsung, and Google’s purchase of Motorola among others.

The Rise of Android

Android

If there is going to be one bite into Apple’s success it would be Android. Hardly anyone had noticed or even heard of Android back in 2005 when Google purchased the company. Back in July 2007 when the iPhone emerged, and took the world by storm, Google launched its first Android platform just a few months after. But the early versions were problematic and paled in comparison to the iPhone. I covered a brief history of Android in a previous article, Will the Playbook Save RIM?

Today the iPhone and Android are the definitive leaders in the mobile marketplace. However even since last year, Android continues to take a huge bite out of iPhone sales. Samsung is very close to being the world’s leading mobile phone maker, especially with its Galaxy running Android, and that trend looks to continue well into next year.

A Company without its Visionary

Steve JobsApple is indeed a wonderful company that produces amazing products – no one can argue with that. But all of these products were pioneered when Steve Jobs was alive. Remember, Steve Jobs was the creative force and visionary behind Apple’s success. As John Heinzl has pointed out in his video, this seems to be something investors have forgotten.

Without Steve Jobs there wouldn’t be an iPhone, iPod, or iPad. In early March MoneyCone wrote an interesting post on The Many Inventions of Steve Jobs. There can be no doubt that Steve Jobs changed the technology landscape of the 20th century, and was the Leonardo da Vinci of our times.  So where does that now leave Apple?

It leaves Apple without its founder, mentor and pioneer, riding on the strength in sales of the iPhone and iPad. We can’t predict the future, and sales for iPad and iPhone remain globally very strong. However, it could be difficult for Apple moving forward, especially with Android becoming a leading mobile platform. What Apple (AAPL) needs moving forward is another iPhone or iPad. Perhaps Job’s left some interesting patents and ideas for his creative team to develop – you never know. ;)

Readers, what’s your take? Do you own Apple Stock? Are you taking profit, holding or buying?

27 Responses to “Should You Take a Bite into Apple?”

  1. youngandthrifty

    Apr 27. 2012

    I think $600+ per share is ridiculous but then again, I thought $200 a share for Apple back when the market crashed was really high!

    I agree with all of the points you mentioned. I guess we’ll see soon enough!

    • The Dividend Ninja

      Apr 27. 2012

      Y&T I think AAPL is overvalued, and has more potential for decline at these price levels. I was considering it also at around $300 /share. But then I’m not an iPhone user like U. ;)

      Cheers!

  2. Steve@thelooniebin

    Apr 27. 2012

    Buying Apple shares goes against my dividend investing strategy because they just started paying a dividend…again.

    I’m not a huge fan of tech stocks to begin with because of their volatility and would rather invest my money in something a little more stable like consumer goods or utilities.

  3. andysterdam

    Apr 27. 2012

    I’m unfortunately holding AAPL at a loss, shameful I know. I bought it when it was riding high and now I not only missed out on the latest rally I’m keeping my fingers crossed that there will be another rally so I can dump my holdings for good. This has been a valuable lesson, for what it’s worth. Always set a stop loss for non-dividend paying stocks. AAPL has been trading sideways for the last couple of days, but hopefully it will bounce back.

    Tech stocks are indeed volatile beyond measure, and the only ones truly raking it in right now besides investors who bought ages ago are hedge funds and other big money. I was extremely angry to see how all the money made in the rally happened in after-hours trading, meaning that the little guy had to take a huge gamble before the market close on Tuesday without the earnings announcement. Why don’t they make earnings calls before the market opens to give everyone a level playing field? Or halt trading until the next day? I’m angry and despondent over the market manipulation. I can only hope to break even now and get as far away from this money-sucking machine as possible.

    To end on a brighter note, I really enjoy your blog and I’ve learned a lot from you here. I should say that apart from AAPL I’m a fairly conservative index couch potato with TD e-series and Vanguard with Questrade.

    Cheers, Andy

    • The Dividend Ninja

      Apr 27. 2012

      Andy,

      Chasing a high-flying stock, is always going to lead you in trouble – when it looks like something is going up forever, it is certainly not the time to buy. I know that seems obvious after the fact… Lesson learned – we all make that mistake once. ;)

      I would say go ahead and set a stop-loss for $600 and get out early – you could even put a limit on the stop loss if you wanted. I doubt you lost much at this point. You may lose a little bit now, maybe 10% or so, but it could be much worse later on should there be a sudden decline.

      With the stop loss you are also protected on the upside, and if AAPL continues to soar, then you will easily make your money back.

      Conversely if you are buying any stock, always set a limit price when buying, especially if the stock is red-hot or in the news. So you at least you pay what you perceive as your top price. For example stocks like Rogers Communications and Encana have recently seen 5% to 6% swings in the daily price. ;)

      Cheers

      • andysterdam

        Apr 27. 2012

        Thanks for your reply and wise words! I really needed to hear some advice from someone who’s been at this game much longer than I have. I completely agree with you about the need to set stops and limits. You’re right, in the grand scheme of long-term investing I really haven’t lost that much. I guess I’m still smarting from the recent lows in the 550s that we saw before the earnings call, but I need to get past that…

        As a new investor I’m quickly realizing how emotional an investor I can be, a humbling experience after thinking I could outsmart the emotion-driven herd! Stops and limits no doubt help to take hormones out of the equation and avoid momentum purchases, such as my AAPL impulse buy.

        This was a much-needed boost. I’m glad that there are guys like you, Canadian Capitalist and Andrew Hallam out there to help cut through all the noise, hype and fear mongering from BNN & co.

        I’ve set a stop-limit, as you’ve suggested and let the chips (apples?) fall where they may. Thanks again! :)

        • The Dividend Ninja

          Apr 27. 2012

          Sure, just don’t get mad at me 3 months from now when it goes down to 550 and up to 800 or something. LOL I do have a discalimer on the website, where I’m not supposed to give financial advice. Anyway sounds like you will sleep easier at night either way. ;)

          Cheers

          • andysterdam

            Apr 27. 2012

            LOL, no worries! :) If I had invested rationally in the first place I wouldn’t be so sleep deprived and anxious now. One thing that’s quickly becoming pretty clear to me is how market timing is a fool’s game and how rear view mirror regrets are as pointless as wishing you’d picked last week’s lottery numbers! Cheers, Andy

          • andysterdam

            Apr 30. 2012

            So glad I’ve sold off all my AAPL shares with a stop loss! It’s now trading below $590. A huge burden is off my shoulders now and I’ve no intention to going back to this nightmare. Tech stocks are just too volatile, and I feel burned by it. Lesson learned!

  4. I had Apple during the first iPhone launch at $90 and sold at $180… That was enough for me then. I thought that iPhone would help promote sales of the Mac along with the fact that they used Intel chips.

    A few points I would like to make:
    a) Steve Job probably left the company with a couple of ideas to work on so there probably is another innovation but can they execute on it.
    b) Mac sales have not picked up … We are not fully ready to have cloud computing and pay for services and bandwidth everywhere and what made Apple what it is is the Mac and the business is not growing anywhere near what the iPhone and iPad devices are.
    c) The iPod probably isn’t selling as much either now and it’s probably important to relate to that in terms of growth

    I’d rather invest in a chip maker right now but I have to say that they have probably a few years to go with growth in markets across the world and improved chips quality on the devices.

    What really boggles my mind is how Apple makes so much money while the world is in a drastic economic situation. Where is everyone’s priority?

  5. DSO

    Apr 27. 2012

    Apple makes up a large part of my portfolio and I’ve owned it since it was at $91.70 a share in October 2008. My price target is $750, and I seem to raise it each time they report earnings because they continue to produce incredible revenue growth. Apple is trading at 12 times earnings for 2012. I just can’t see Apple with a P/E ratio of 12 after it reports earnings post iPhone5 launch. It normally trades around 14x. I expect them to continue to do very well. Valuation will continue to matter more than stock price.

    Apple has started a tradition in recent years of announcing new products at their Worldwide Developers conference in June. I’m a little hopeful that the promise Tim Cook made on the earnings call about delivering innovation will come true in June and they will announce a new product. I’ll have to wait and see. They might just announce a new iMac which would make us all yawn.

    If no new products are launched this year I think I’ll be out in early 2013, maybe sooner if it seems others are getting the same idea. Just my 2 cents.

    • I am constantly astonished at their sales. It’s a smart phone revolution. Not only that, but users who have one already are just upgrading after every iterations.

      This is the part that is fueling their sales and it defies expectations. Does everyone upgrade their TVs every year? or their cars? or appliances? or any other electronic devices. Yet, if you have an iPhone or an iPad it seems that you are compelled to get the next one.

      It’s not the Mac, or the iPod or the Apple TV or any other products that is pushing their sales, it is simply the iPhone and iPad. Based on sales expectations, iPad 3 is going to be huge so fear not, the stock will probably go up with future earnings.

      I am on the sideline and watching though :)

  6. Peter

    Apr 27. 2012

    Since I own US index, Apple is such a big part of it. Hence, no need for me to own it individually.

  7. Six Figure Investor

    Apr 27. 2012

    It’s should be obvious that Apple is cheap @ $600 or even $750. Unfortunately, I see even professional investors get caught up in evaluating a stock price based just on it’s nominal value.

    It’s $500! Can’t go to $700 because that number is just too big!

    Take a look at any of these companies, which are considered Wall Street growth darlings: AMZN, ULTA, CRM, CMG, even FAST, which isn’t even sexy. Wall Street has recently discovered that V and MA are undervalued, expanding their P/E’s. All of these companies trade at ridiculous valuations compared to Apple.

    The lowly Altria (MO), presumably a business that is serving a dying product on its way out trades at a large premium to Apple.

    Also, can’t forget to backout the $115B of cash on the balance sheet!

    Even a 20 P/E for 2013 earnings, gets you to a valuation of $1000.

    Han’t anyone been payng attention to how fast earnings have been growing?

  8. I love their products but the stock seems overvalued to me. Actually I use a company’s average dividend yield to determine if a company is undervalued or not. Apple’s dividend hasn’t been around long enough to calculate an accurate average dividend yield.

    When it comes to tech products consumers are finicky. There is no brand loyalty. You gave a great example of RIM products. Here’s a quick history lesson:

    – The iPad did not exist 2 years ago

    – 4 years ago the iPhone did not exist

    – With the Sony Walkman, everyone thought Sony would be the world leader in personal music devices, then came the iPod

    – Hotbot.com, Altavista.com were once consider “the” search engines then along came Google

    – Netscape Navigator was “the” web browser then came Firefox, Chrome, Safari, IE

    – The Amiga computer was once considered the de facto standard for video editing

    History is littered with technology products that no longer exist because they became obsolete. When it comes to technology no one can predict what the next big success is going to be. Therefore when it comes to Apple stock, I’m going to pass.

    • The Dividend Ninja

      Apr 29. 2012

      Kanwal, as you point out the next best thing in technology is usually unexpected and swift. ;) I believe Apple is nearing its peak, not in terms of price, sales or earnings, but in terms of innovation. Now that Job’s isn’t running the show, let’s see what happens next.

      Not all great companies pay a dividend, and that does not always make them poor investments, however dividends in the tech sector is a new trend.

      Cheers

  9. farcodev

    Apr 29. 2012

    Since AAPL is far out what my pocket can afford, I don’t even consider this stock.

    The people who bought it in 2008 made a good move :)

  10. Rock the Casbah

    Apr 29. 2012

    I actually bought a decent number of AAPL shares back in mid 09 @ about $100. Then a bit over a year later I sold some @ over $300. Then a bit later I sold most of the rest at about $350. I still own some (20%) of the original shares I purchased. At the times I sold, I figured I was doing pretty well (Heck, more than tripling my investment in a little over a year – NOT bad I thought). And my intent was NOT a long term investment in AAPL but rather to take advantage of the weakened market in 09, invest in some stocks w/ good short term growth potential and sell them within a relatively short term timeframe to make substantial capital gains. These gains could then be used to fuel the purchase of dividend growth stocks (my true long term strategy). Essentially, I made some concentrated stock picks to “turbo charge” my available capital to purchase dividend paying stocks.

    I remained weary of any tech stocks as a part of a long term Divy portfolio and AAPL, at the time, did not pay a dividend. So, I decided to sell most of it. In fact by keeping some I actually violated my “rule” of having only dividend stocks. Of course that’s no longer true as they pay a dividend.

    Guess this verbose comment has two points: I agree that it’s hard to build and maintain a strong moat in tech where the next innovation can come suddenly and unexpectedly. As such, I think they generally do not make good additions to a dividend portfolio. There are always exceptions (I was converted on INTC) but I’m not sure AAPL (even though it now pays a divy) is one of them.

    Secondly, I think measuring “success” in a portfolio focused on Cap gains is problematic. Was I successful w/ my investment in AAPL? Well, as I said on the one hand I more than tripled my capital in a little over a year. BUT, on the other, I have friends that are incredulous that I sold the “greatest stock ever” so soon to buy some ” stodgy, boring” stocks like PG. Heck, even I kick myself sometimes knowing I could have sixtupled my capital.

    But, at the end of the day I still think the tortoise beats the hare and the DG is still the way to go long term.

    • The Dividend Ninja

      Apr 30. 2012

      Rock the Casbah awesome comment, thanx! :)

      You know, I would have played AAPL the same way, selling half then half again. Nothing is certain, and the price of AAPL today as compared to a couple of years ago is hindsight. If you made money in the market – deal is done, and pat yourself on the back with no regrets. :)

      I’m more concerned with people who are buying at these price levels – becuase regardless of fundamentals, price does matter. There is far too much optimism and hype surrounding this company right now.

      Cheers

  11. Paul

    Apr 29. 2012

    Now AAPL P/E ratio is 14.7. The S&P500 P/E 15.5. I think it good choice to buy AAPL now. It is a stable company, sales have increased an incredible 68% last year, and is cheaper than the market.

    Paul
    kainvestments.com

    • The Dividend Ninja

      Apr 30. 2012

      Paul I’ve always been wary of using the PE Ratio as a difinitive metric. Most tech companies do naturally have low PE Ratios, for whatever reason.

      As an example take McDonalds Corp. (MCD) which has had a PE Ratio of aroudn 15 to 30, with no correlation to price, over the last 10 years or so. What could you possibly infer from this chart below of the PE/Ratio as compared to the price of MCD?

      http://ycharts.com/companies/MCD/pe_ratio#series=type:company,id:MCD,calc:pe_ratio,,id:MCD,type:company,calc:price&zoom=10&startDate=&endDate=&format=real&recessions=false

      (copy the entire URL into your browser)

      Cheers ;)

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