One of many "truths" of the past that must be re-examined in the light of 2004 should be the whole idea of rational markets.
How else to you explain this? Apple stock is up to $68, which works out to a price-earnings ratio of....93? (Yep, carry the 1, zero...93.)
Now I think the iPod and iTunes are nifty, too. But as economic events they are no grand slam, set against the size of the underlying company. These are singles and doubles, not home runs.
Besides that, there's risk. There's growing competition. Apple has gone from being a computer company, compared to HP, Dell, and Gateway, to being a consumer electronics company, compared to Sony, Matsushita, and Philips.
It's a step up in class, maybe. But can Jobs hit the pitching in this league?
This, I should add, is just one example of a market that's beginning to look a bit like the one we saw in 1999.
Google currently sports a P/E of 216. Yahoo (which served up these results) has a P/E of 103.
Now consider the fact that you can, today, put your money into 30-year government bonds and get a 5% coupon. For those playing at home, this works out to a P/E of 20 -- 20 years of earnings from a government bond at 5% gets you your money back.
Now I have no doubt that Google sports better prospects for growth in sales and earnings than the U.S. Treasury. But 10 times better? Really?
Those putting their money on such a proposition are, without a doubt, investing with their hearts, not their heads.
And that's not a rational market.
To equate the entire market to 3 stocks is not rational either. The overall market does tend to be very rational, especially when viewed over long periods of time. Short term "investment" and stock picking is nothing more than a gamble. Indeed, it is very similar to betting on sports. The idea that you can time the market and reliably make money on aberations like the P/Es you noted is akin to the idea that there is a system that will allow you to reliably make money on games of chance.
One of the great questions of philosophy is whether it is rational to be rational.
Permalink to CommentPiper Jaffray has recently raised its target for Apple stock to $100. There has been a flury of interesting fundamental information coming from Apple in recent weeks. There was a 250% increase in the number of developers. There is a "Halo" effect that finds 6% of Windows-using iPod owners becoming "Switchers" and buying Macs, presumably based on postive experiences with the iPod (or perhaps with Apple's retail presence). If the news is as good as it sounds, given Apple's increasingly profitable track record since the release of the first iPod, a $100 price target isn't terrbly unrealistic. With iTunes Music Store, Apple is steadly gobbling up the global music market in 0.1% chunks, which is really pretty amazing for such an old, established industry where few of the other online players have had any success. It won't be long (maybe mid 2006 or so) before Apple iTMS accounts for 5% of global music retail sales. That alone is amazing to me.
All that said, I'm not really bullish on Apple stock excluding the hyper factor. The 250% increase in developers? Most attributable to open source enthusiasts and students, who aren't making products that my Mom can use (and thus not playing into Apple's traditional competitive advantage). Additionally, Apple is preaching to the converted with its developer tool offerings. They offer tools for making Mac OS X software -- less than 3% of the global PC market. No tools for "straddling" -- attracting users who have Windows and Macs and would like to use the same software for both. As a software developer, I spend money on a third party tool (REALbasic) to reach Mac and Windows markets. Funny thing is, REALbasic is getting to the point where it's saving Apple's butt in terms of software availability and path for the switchers, but not getting any props from Apple.
Another stat to look behing... The 6% of Windows using iPod customers who switch to Macs. In the rosiest scenario of a mature iPod market, this would add fewer than 1 million Mac units per year, which might bump Apple up to 3.5% of global PC sales.
Apple has set very high expectations in recent months. It will be interesting to see if they can meet them. Of course I'd like to see that as a Mac enthusiast and a suppler to the market, but I'm not convinced that the stock price belongs much higher than it is for awhile.
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