Wednesday, January 19, 2011

Even as Analysts Raise Price Targets Apple Stock Dips Slightly After Blockbuster Earnings. Is Aapl Suffering the 'Tobacco Stock Syndrome'?

Apple announces  mind boggling earnings where it's revenue grows 71% coming in at $26.74 billion which is something like $2 billion more than consensus analysts estimate. It's net profit was a whopping $6 billion (to put that into some perspective in the Oct. 2010 earnings report Microsoft earned $16.2 billion in revenue and $5.41 billion in net profit. Msft is yet to announce the Christmas quarter). 

Analysts have been busy raising their price targets for Apple. 

But even with this blockbuster financial report Aapl dropped further today
(-0.53% plus -0.64% after hours)  following a drop yesterday which was caused primarily by Steve Jobs announcement of his medical leave. There were macro reasons of the market falling in general today but it's still striking that Apple stock will drop after such earnings. (Apple has a history of stock pullbacks after great earnings but this time with such historic earnings you would think it would buck the trend).

JP Morgan analyst Mark Moskowitz comments that "Apple is trading like a value stock and not as the high-growth story in large cap equities,” . Jim Cramer called Apple at 14 times earnings as 'Dirt Cheap'.

That's just it, Apple is a tremendous growth story, it's income growth is phenomenal, yet some of its rivals are valued higher, some much higher by Wall Street. Amazon with trailing 12 month income growth of 40% or so (vs Apple's 70% or so) has a P.E of 75 (forward P.E in the 50s). Netflix too has a P.E over 70.

If valued like that aapl should be way higher than its current price (it need to more than double to match Amzn's P.E) . Aapl used to trade with much higher P.Es but is now trading like a good value stock and not a high growth one. Even if the recession has knocked P.Es down in general, Apple's valuation with its near $60 billion cash pile is low.

So what's up?

First of all I guess is what analysts call P.E compression, as the market cap gets bigger the P.E ratio shrinks as the conventional wisdom says that companies can't grow at breakneck pace forever and investors bulk. Apple has been turning that bit of wisdom on its head as it's growing like a startup beating analysts estimates quarter after quarter. But as Apple reaches epic size with only Exxon bigger than it in market cap the big investors (who control most of Apple stock) are wary -- unfortunately.

Then there is the 'Tobacco Stock Syndrome'. I'm no expert on the Tobacco industry or its stocks but I was reading an old book where it describes how the Tobacco industry makes huge amounts of money yet the stock prices don't reflect that. The reason is that investors are worried that one day the industry might be hit with a 'bomb' in the form of losing a massive lawsuit from cancer patients or restrictive new regulations. The bomb or 'worry' for investors in Aapl is Steve Jobs. 

Steve Jobs is so entwined with the mythos of Apple that big investors don't know quite how to assess the risk. Can Apple continue to thrive without Jobs? Will the magic still be there? Some of these big investors like mutual funds, pension plans etc are run by people who seem to know even less about Apple (and tech world in general) than geeky Apple fan fans who hold relatively small amounts of stock. I read somewhere a few years ago that a tech mutual fund manager saying if he put money in IBM or Microsoft he's clients are happy as they perceive them as 'no risk'.  

So unfortunately we are stuck with these two problems: P.E compression and the worry about Apple without Jobs. I've written elsewhere that the Apple bench is deep in talent and will perhaps write more on it and Apple's great prospects. Still even with these two big issues Apple stock has amply rewarded its buyers, tripling in the recession, 4000% increase in the last decade, as the companies revenues have grown so phenomenally. Only thing is I wish Wall Street will value Aapl as much as the other high growth stocks.