Friday, July 27, 2012

ROI; Should You Sell Apple? Arends: Analysts and consumers are nuts for Apple, but iMania may not last much longer.

Expect the lines to form early on Friday outside Apple stores and electronics retailers, as devotees battle to get their hands on the latest iPad.

The company is already running short. Go to the company's website and try to order one, and you'll be told shipping is now "two to three weeks." Apple says orders are "off the charts" and in the stores you're limited to two new iPads per customer. Panic stations! How will you cope if you have to wait?

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Everybody loves Apple (AAPL) . The stock has skyrocketed again this year, zooming to $568. Apple has gained another $180 billion -- equal to Johnson & Johnson's entire market cap -- in value just in the five months since founder Steve Jobs died. At $530 billion, it is by far the most valuable company in the world, worth more than ConocoPhillips, Du Pont, Campbell's Soup, Disney, Boeing, Estee Lauder, Target, Tiffany's, 3M, Kellogg's and Caterpillar put together.

People are nuts for Apple products. They don't want anything else.

Go to a Best Buy and you'll see people crowding around the iPad displays, while the other tablets sit there, ignored and on sale.

Go into a cellphone store and you'll see something similar. Friends clutch their new iPhones like hunting trophies. Over Christmas I was in London. A young woman walked into the cellphone store while I was there. And she was absolutely insistent. "I absolutely must have the latest iPhone," she said. She had no interest in anything else.

No wonder the company's fourth quarter sales were up 73% from a year earlier -- even while Apple enjoys astonishing 80% gross markups on its products.

On Wall Street, no one wants to stand in front of a moving train. No one dares short this stock. Out of 53 analysts covering it, just two have it as an underperform or sell. Apple has gained a third in value just since the start of this year. And it still may not be expensive.

The company has $55 billion in current assets and $67 billion in marketable securities, against $49 billion in liabilities. That works out at about $80 per share in net cash and equivalents. Put that aside and you're paying about $450 for a booming stock which is expected to earn $43 a share this year. That's a cheap price to earnings ratio of about 11.

Can Apple $1,000 be far away?

You can get there. According to Thomson Reuters, Wall Street analysts expect the company's earnings to hit $53 per share by 2014. If Wall Street then valued the stock at fifteen times earnings -- a reasonable rating, many would say -- that would get you an $800 stock. And analysts also believe the company by then will have about $210 billion in net cash. No kidding. That'll be worth another $220 a share.

Maybe this is why the company doesn't want to pay a dividend. Apple, $1,000, here we go?

Well, maybe.

But at the risk of putting my mouth in the jaws of the lion, here's another view.

Yes, people are lining up to buy Apple products. Yes, they want iPhones and iPads and MacBook Airs.

But here's the problem. There really isn't any great substantive difference any more between the Apple products that everyone oohs and aahs about and their competition.

Android tablets like the Samsung Galaxy are pretty much as good than the iPad. (Some might argue they are better. And they are usually cheaper, because the non-Apples have to cut prices to shift stock). Android phones are on a par with iPhones, and give you a choice of hardware too -- big screens, small screens, keyboards and so on. Heavens, even Microsoft may have caught up: The new Windows Phone 7 operating system is certainly competitive.

Sure, you can give the edge one way, or another. But it's a difference of degree, not kind. There isn't much in it.

As for laptops and desktops? When I walk into Starbucks, or walk through my regular Amtrak train, I notice most people are using Apple computers as well.

I get it. I've used a Mac for years. I prefer them to PCs. But after my latest hard disk broke -- yet again -- I balked at spending yet more money at the "Genius" bar.

(Incidentally, they are called "Geniuses" because even in a recession they can get you to spend $85 on a $3 power cable without complaining.)

Apple laptops start at $1,000, and my last one cost me about $1,400. Meanwhile I can buy a perfectly decent Windows laptop for $350 or $400.

Maybe the Mac is better. But three times better? Will it last three times longer? Don't bet on it.

The usual response from Wall Street analysts is to say, "see -- everyone wants Apple products! That's why this stock is going to the moon!"

But that is upside-down thinking.

If Apple is selling hot consumer products simply because of its brand name and aura, it is no longer just a technology company. It is something much more dangerous. It's a fashion company.

Gulp.

The problem with fashions is that they change. They always change. There are absolutely no exceptions to this rule, ever. And yet people are always absolutely astonished when it happens. Every fashion seems like it is forever, until it isn't.

The history of modern society is littered with the wreckage of the consumer trends of yesteryear. Remember when everyone had to have a Motorola RAZR? Or twelve years ago, when Nokia phones dominated the planet? Go back far enough in time and you will find absolute manias for Rubic's cubes, bell-bottoms, hula-hoops and the Charleston. Watch Downtown Abbey and you will see a time when peacock print dresses were all the rage, and the telephone was as amazing as the moon landing.

It's dollars to donuts that someday -- and probably quite soon -- people will look back on our current iMania, and laugh.

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