Since the beginning of 2012, shares of Apple Inc. have soared into the stratosphere, up more than fifty percent in three months to an eye-popping $628 a share. In this time period, late January to be precise, Apple blew Wall Street away with their first quarter 2012 earnings report, jumping from $420 a share to nearly $450 the following day. This once again illustrated the difficulty industry analysts have in trying to predict and define quarterly earnings expectations for the innovative company whose popular products have literally changed the world.
While Apple is known for sandbagging analysts and adroitly managing earnings expectations, it is similarly known for delivering stellar performance results. In truth, Apple has morphed from being a high-tech industry titan into the most clever consumer products company on the face of the earth, with the transformation all occurring within the last decade. Since the debut of the now omnipresent iPod in 2001 along with its accompanying iTunes Web Store, Apple has established itself as one of the most beloved global brands, as well as the premier designer of the niftiest high-tech consumer hardware devices on the market. So, at over $600 a share, is Apple’s stock overvalued?
The answer is found in the value of the stock market generally, because it turns out that Apple Corporation currently constitutes well over 17 percent of the NASDAQ-100 Index, and nearly five percent of the S&P 500 Index. To put that in some perspective, Microsoft, Google, Intel, and Oracle combined make up 25 percent of the NASDAQ-100 Index. That means one company alone, Apple, makes up two-thirds of the weight that four of the biggest technology companies combined contribute to that particular market index.
The explosive gains reached in the NASDAQ indices since the year began are due in large part to the self-fulfilling feedback momentum loop of Apple stock and the various Index ETFs (Exchange Traded Funds) designed to simulate popular indices with the respective holdings in their investment trust portfolios. Described in the simplest of terms, the following is a basic description of how it works. On a given day, Apple shares rise due to factors such as the strong January earnings announcement, investor demand to own the dynamic growth company’s stock, or perhaps rumors about a new product.
Due to its current disproportionate influence and weighting in the NASDAQ-100 Index, the increase in Apple shares triggers a rally in all the various ETFs that use this index as a benchmark, such as the popular NASDAQ Investment Trust (QQQ). This price action attracts the interest of investors who are hungry for performance, but seeking what they believe to be the diversification offered by putting their money to work in a basket of stocks in different companies, rather than researching and buying stocks in single companies.
Unbeknownst to these investors, when they are buying into an ETF like the QQQ, for example, they are actually putting close to twenty cents of every single dollar invested into a share of Apple, as the investment trust and the entire realm of mutual funds designed to emulate the popular indices then must rebalance their portfolios by purchasing stocks at the beginning of the next day’s trading session to reflect the new money that was poured in the prior day.
These purchases, in turn, serve to put more money into circulation chasing the fixed float of Apple shares in the market and consequently driving the price up even higher. This index-driven buying and its feedback on the stock explains why such a company as Apple, already possessing a mega-sized market capitalization, has currently gone up over forty trading sessions out of the fifty since the company reported its first quarter earnings results on January 24, 2012. It also explains why the NASDAQ index turned in its best quarterly performance since 1991 when the quarter officially ended on March 31.
In addition to the fact that this disproportionate weighting in such a vital major stock index is accelerating the upward momentum in Apple to near parabolic levels, there are several other factors driving the rise in the company’s shares. One that coincidentally is related to the ETF feedback phenomenon is the psychology of fear and greed that flows through the minds of every investor when considering whether to buy, sell, or hold a stock. Specifically, the current holders of Apple stock, perhaps even investors who have held on to the stock through $60 a share, then $100 a share, $200 a share, and onward to its current levels.
Even through the risk of new product launches, and the uncertainty surrounding the illness and heartbreaking death of its visionary co-founder and CEO Steve Jobs. These investors may look at Apple’s current stock price as seeming high, but may very well recall similar reactions at many of the other pivotal price levels and throughout major company events over the last decade. These investors who held on for the ride have been rewarded handsomely, and likely feel that it would be foolish to sell on the basis of the stock’s price going up – which is, after all, what they’ve become accustomed to with Apple.
The same holds true for fund managers and institutional investment managers charged with the responsibility of delivering the highest possible rate of return for their clients. Few of these money managers are so much driven by outright greed as they are by their fears of missing out on one of the greatest corporate growth stories in history, and its accompanying rise in stock value.
The other major consideration is the fact that Apple has imprinted itself on more than just its customers and users of its many innovative products, as it has also developed an enormous impact on the technology industry through its vendor networks and OEM suppliers. The number of companies, both publicly traded and privately held, that are reliant in some way on their business relationships, contracts, supply channels, and development deals with Apple has increased exponentially in the last decade.
Take the effect of the iPhone alone as just one product – between the product’s parts suppliers, mobile network providers (including Sprint, which just came online in late 2011), manufacturers of licensed and unlicensed accessories, third-party retailers, and the universe of application developers, the total number of companies touched by the iPhone is nearly incalculable and growing by the day. Add in the companies of all sizes throughout the world that offer an iPhone mobile app to help them interface in some way with their target market, and the omnipresence of simply the iPhone is truly staggering. Considering the iPod and iPad have similar halo effects on the music, media, entertainment, information, and publishing industries, and you can begin to see the enormous breadth of Apple’s global footprint in terms of both commerce and lifestyle.
Apple’s pervasiveness in so many facets of the average person’s daily life, and its role as an economic multiplier accelerator for so many businesses around the world, also make it unusually sensitive to any changes in economic circumstances. For instance, if the economic challenges in Europe begin to metastasize and spread from recessions in Greece and Portugal to the rest of the continent, or even to North America and Asia, then Apple will be unable to escape the slowdown.
With Apple’s stock having a beta of exactly one, meaning the stock moves in a one-to-one correlation with the broader market, it represents the same risk as investing in the S&P 500. This makes sense, as it was earlier pointed out how Apple is currently weighted so heavily and carries so much power over the values of the indices and ETFs. In this way, Apple presents at least the same risk as the general market, with some additional risks of executing business operations and continuing its peerless record of growth and innovation.
Until proven otherwise, Apple should continue to receive the benefit of the doubt when it comes to its ability to successfully design imaginative and useful products that the marketplace will embrace, even without its visionary leader Steve Jobs at the helm. In the end, Apple’s value is determined in large measure by the perception that the global economy will continue growing, and consumers will have enough disposable income to keep on buying the company’s devices.
One way to determine if Apple stock is overvalued is to simply look at its current $628 a share price and realize that is the equivalent value of a brand new iPad 2 and a 160GB iPod Classic purchased together as a package. Now, ask yourself – Apple stock or Apple devices? Which you would prefer to own?