Is Apple the new Gold?
It is an era of financial uncertainty, and investors are desperate for their holy grail – ‘supernormal returns.’ Central bank interest rates are rock bottom, and the Federal Reserve is intent on continuing to lubricate the cogs of the global financial machine with more quantitative easing. A particular asset emerges that seems to make manifest every investor’s dream, combining profitability and predictability. Competition is fierce, and rivals investments are plenty, but they fail to draw the same appeal.
The market piles in with relish, and investors from other areas, lacking the necessary technical expertise and simply trusting the bull market, join in. They too receive supernormal returns.
Those with the most accurate valuation of the stock and its trend growth are the first to sell. The inevitable correction rapidly follows. At the first sign of a downturn, other investors sell and the price collapses back to pre-frenzy levels, or lower. There are many winners and losers.
This story should be familiar. It represents the 2007/2008 sub-prime mortgage crisis.
It is also exactly what is happening to Apple stock.
Of course, no-one can deny that Apple is a hugely successful company. Valued at around $533 billion, it is the largest publicly traded firm in the world by market cap, and had revenues that superseded $100 billion in 2011. It is larger than both Google and Microsoft combined by revenue and profit, and has moved seamlessly on from the death of the inspirational Steve Jobs. However, the world of technology moves very, very quickly. At its trough in 2008, Apple was valued at just $82 a share.
Since then, in less than four years, it grew by a factor of eight to a high of $633 in April 2012. In fact, in just the first four months of 2012, the stock appreciated by 50%. For a company, or any type of investment, for that matter, to gain 50% in four months, there must be very good reason for it doing so. Have Apple released any products other than slight modifications on previous models? No.
- No new iPod, as of yet
- iOS 6 due later this year
- Minor upgrades to the MacBook Pro
Have structural factors affected the industry, making their products hugely more desirable? No.
- Real wages have barely grown, and spending remains cagey
- There have been no technological leaps incorporated into Apple products
- Developing economies have also seen their growth, and therefore spending confidence, stall
Apple are widely reported to be sitting on around $100 billion worth of cash, although some of it went towards their first ever dividend offering. Nevertheless, if they have a huge idea, why is that money not being used to develop it and deliver it seamlessly into their range? There is, therefore, a huge amount of speculation surrounding the pricing of Apple stock, given that it can be affected massively by infrequent new product releases. No-one doubts that the company will continue to grow, but can it sustain the rates of appreciation it achieved in the first quarter of the year? It has certainly stalled in the last two months.
In many ways, such exponential growth should send warning signs to the astute financier, and it is impossible to escape the theory that in these times of huge financial unpredictability, Apple may be the new safe haven that investors have been craving. Robert Schiller, the co-author of Animal Spirits, has come out and said that such behaviour is reminiscent of a bubble, and that he “wouldn’t buy Apple stock.” Nevertheless, just as those who buy gold have the mental support of dealing with an intrinsically valuable commodity, so too might investors hold a similar belief in the tangibility of the iPod. Importantly, as this article in the Economist points out, “a higher share price is justified only if Apple continues to meet earnings expectations.” Needless to say, these expectations are very high.