Disclosure: The writer owns shares in Apple.
The price of Apple shares is falling. Fast.
Just last Tuesday, the stock closed at a high of over $640. Today, it closed at $580.13 — a loss of about 10 percent.
Why is this happening?
Of course, no one understands for certain the whims of Mr. Market. But Apple has suffered several bruises this month, perhaps making investors think twice about the company's value.
News broke last week that a worm had infected one in a hundred Macs, tarnishing the Apple OS's reputation as a virus free environment. The company has responded aggressively, however, quickly halving the number of infected computers.
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Today, the Wall Street Journal is reporting a rumor — sourced to Dave Lutz, an analyst at Stifel Nicolaus — that Apple may release an iPad mini, a $200 version that would compete with the Amazon Fire and other, less pricey tablets. That, some analysts worry, might cannibalize sales of the current, wildly profitable iPad, curbing the rapid growth and high margins that have made Apple the world’s most valuable publicly-traded company.
Apple is also facing a suit from the Department of Justice, which accuses it of colluding with publishers to fix eBook prices. The stakes are modest compared to Apple’s multi-billion dollar universe, but the case was announced on April 11, day two of Apple’s current five-day share price drop. That day, the company’s price declined even though the tech-heavy Nasdaq rose, suggesting that the suit may have been a factor.
Although several publishers have settled with the government, Apple is fighting the matter in court. The battle may be a tough one. As evidence, the government can refer to Walter Isaacson’s biography of Steve Jobs, which includes the kind of inside evidence that can make prosecutors salivate: details of the late CEO’s discussions with publishers about book prices.
The case is complex however. As the NY Times has pointed out, if the government wins, the biggest beneficiary will be Amazon, which controls 60 percent of the eBook market. Indeed, the publishing industry sees Amazon’s dominance, and its below-market prices, as an existential threat.
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eBooks are a minor part of Apple’s earnings. Still, this battle with regulators could distract executives, or could harm Apple's image with consumers — unless the company can generate sympathy for its efforts. Jobs, after all, had described his negotiations with publishers as an effort to protect them from the fate that has afflicted so many other sectors upended by new digital technologies.
Another explanation for Apple’s share price decline, and perhaps the most likely, is that a correction is only natural.
While some analysts have predicted that Apple’s share price will climb to $1,000, others say the current drop is a matter of the stock collapsing under its own weight.
After all, Apple started the year at just over $400 a share, and had risen by 45 percent by last week. Its value has jumped by an astounding $400 billion since 2008; only a small number of companies have ever reached a market cap equaling that increase. That run will go down as one of the greatest wealth creation stories in history, regardless of a relatively minor retreat.
So is it time to dump shares, or pick them up at a bargain?
The gadget maker’s share price is arguably still reasonable, or even cheap. Consider its price earnings ratio — a key statistic indicating how the share price compares to the company’s profits.
The PE ratio is calculated by dividing the share price by the past year’s income — in other words, a company that earns 1 dollar per share, and is valued at $10 will have a PE of $10. It's perhaps the most reliable indicator of whether you're paying too much or too little for a stock. The historic average on the S&P 500 is about 18 times earnings (although the index currently trades below fifteen). Companies that are growing quickly, or that have a strong competitive advantage, tend to be valued higher.
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Apple is trading at an earnings per share ratio below 17. That’s undoubtably a low multiple for a company whose operating income increased by 80 percent last year, and appears poised to continue growing rapidly. On top of that, Apple holds about $100 per share in cash. Subtract that cash from the share price (after all, it essentially belongs to the shareholders) and the PE ratio is more like 14.
By comparison, Google trades at a PE of more than 18, and last year’s income grew at a respectable, but not Apple-like rate of 12 percent. Amazon’s PE is 135; the company’s operating profits last year were less than one-thirtieth (yes, 1/30) of Apple’s, and they actually shrank from the previous year.
The trick for Apple will be to keep innovating, to keep putting out products that people love. It won’t be easy to continue reinventing the world at its current rapid clip, especially without the visionary leadership of Steve Jobs.
Nonetheless, even if growth slows somewhat, it's arguably a bargain even at $580 a share.
I'll hold on to mine for now.