About a month ago an Analyst said on CNBC that Apple is a screaming sell. Watch the clip here. Let’s summarize his reasons for that:
- Market Cap – $865 Billion
- Trading 15% over it’s 200 day moving average
- 17% sales in Asia, China deleveraging
- Apple is in big trouble over the next two quarters
The stock is up about 4% from when he called it a “Screaming Sell”. At the beginning he also mentions that a year ago the price target on the street was $125 and now the stock is trading at $168. Below is the one year chart of Apple in comparison with S&P 500.
The chart above shows that the street target was wrong. Street target is an average of targets predicted by all analysts that cover Apple. Comments like these is precisely why I am skeptical of professional analysts. His “sell” call is related to everything but Apple’s business. A high market cap doesn’t make a company a bad investment if the underlying business is strong. Deleveraging of Chinese economy – considering how secretive Chinese are I am not sure it can be easily deduced that deleveraging will reduce buying power of Chinese consumer. Apple trading above 200 day average – In the long run, moving averages don’t decide stock prices, profits decide. As a small investor, listening to these comments on national TV shakes your confidence in your investment. I am a small investor in Apple and I had to remind myself to trust my research over his comments.
Now let’s follow some of the steps that I have talked about in my previous posts about how to value a company:
- How to Value a company put simply – $865 Billion of market cap doesn’t take in account that Apple has $165 Billion cash (net of long term debt). If you want to calculate how much you will have to pay to buy entire Apple, you should subtract cash from the market cap. That brings the value down to $700 Billion. Apple generates ~$60 Billion of free cash flow per year. Simple back of the envelope calculation (Market cap / Free cash flow) tells us that if one was to buy entire Apple, he or she will break-even in about 11.6 years (assuming no growth or reduction in business). I don’t think if someone has $700 Billion to start a company with, they can create an Apple in 11.6 years.
- Psychological Advantage – Apple’s announcement today about deliberately slowing down the phone because of battery issues should have had a negative impact on the stock. But there was no impact, in fact, the stock was up today. The reasons why I think this admission will have not impact Apple’s sales are:
- Loyal customer base – People love Apple products, some people upgrade to newer phones every year. They can’t think of buying anything but Apple.
- We don’t like change – As an iPhone user you are married to Apple’s eco-system. Switching to an Android or Windows phone will mean learning new software, transferring years of photos & other data to a new environment. Not many people like this idea.
- Let’s revisit the Annual Report, our best friend – Some of the key points from the annual report are:
- The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. There is no other company in the mobile space that controls both the hardware & software of phone. This is a huge competitive advantage.
- The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. This again is a huge competitive advantage. If any new company designs a phone, they will have to encourage the developer community to create apps for the new device and that will be a huge challenge. Depending upon the software, developers might have to learn new programming language.
- Services business is growing at ~23% per year. It now equals the size of a Fortune 100 company. It is bigger than Facebook’s total revenue.
By revisiting my analysis I got the confidence to reject the “Screaming Sell” call. Happy Investing!
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.I am not recommending any of the companies mentioned in this post.
