Is $AAPL overvalued?

There has been much hysteria lately about Apple, and its skyrocketing stock price. Many comparisons have been made to 1999 and the tech bubble. While some current tech IPOs do remind one of the good/bad old days, Apple seems a poster boy for sanity. Indeed, consider the following comparison:

You will see that Apple's valuation is quite reasonable (even more reasonable if you take into account the traditionally conservative forward looking statements), and if you believe that it can maintain its current growth rate, it is actually cheap compared to its tech rivals. Can it? Hard to say, of course, but they appear to have a successful plan, which includes:

• iPhone 5 (coming out either Summer or Fall of this year).
• new generation of (most likely) retina display MacBooks
• a disciplined software strategy which includes the convergence of iOS and OS X
• Apple TV

While all of this is happening, Apple is struggling to meet demand for its existing products. Observations during a recent trip indicate everyone in first class sporting iPhones. It seems clear that everyone in economy wants one (many people have them already), and the iPhone 3GS, from all reports, is a very hot seller (and a money machine for apple, since it costs very little to make). They are about to start making the iPad 2 in Brazil, which will open up the rapidly developing (and tariff protected) Brazilian market to yet another apple money machine (iPad 2, being last year's technology, is extremely profitable).  Apple is also making a lot of money from the very popular Android handsets. So far so good.

Things do not quite look so rosy for the competition. AMZN is operating a fairly mature bookstore business, and its Kindle hardware business is about to be killed by the new iPad, which gives a vastly improved reading experience.

Google's search business is alive and well, but, near as anyone can tell, its many other efforts have produced a string of duds, at least from the business perspective. Android, while popular, generates far more revenue for Apple, Microsoft, and Qualcomm than it does for Google. Google+ has been forced down the throats of the public, which still prefers Facebook by a huge margin. Chrome and YouTube are popular in their spaces, but neither is a big revenue generator. Google seems to lack a coherent strategy -- thank God for search.

Microsoft has an Office money machine, which will continue to crank for quite a while, Windows, and a considerably less lucrative Xbox franchise. Windows and Xbox are being seriously threatened by tablets, and while Windows 8 is an attempt to combat this, it seems to combine the not-quite-ready-for-primetime aspect of Android with the closed programming model, heavily encumbered by compatibility concerns. Not a recipe for wider adoption than the current Office-user user base (I have a Windows laptop just so I can run bloomberg terminal and excel together). Windows phone has been (so far) a failure. No risk of MSFT being the next RIM, but no particularly bright prospects either.

IBM is well-managed and profitable, but not exactly nimble. It is a mature company which seems to have few prospects for (or even interest in) rapid growth. Its R&D is stellar, and it will continue to make money  for the foreseeable future, so I don't think any fund managers will be fired for buying IBM, but it is not clearly a better investment than Apple.

To summarize: I would not be at all surprised to see AAPL hit $800 after the next quarterly report (in less than three weeks),  especially as I think that the new iPad is an unqualified success, and for those not willing to take a naked technology bet, going long AAPL and short GOOG and AMZN would seem to be a wise strategy (as it has been for quite a while).

Update on Market Efficiency

Our last post on the curious behavior of the AAPL stock price was a little over three weeks ago, and since it is now (approximately) two months since Apple's last quarterly report, and since some "forward looking statements" were made in the last report, AND since in the intervening period Apple has

• Announced the new iPad
• Sold a bunch of them
• Announced a dividend (for the first time since 1995) and a stock buyback.

Curiously, the stock price (at this point the run-up has been sufficient to mandate using a log plot) has been increasing almost mechanically log-linearly:

For those who care about such things, the (annualized) Sharpe ratio of an investment in Apple over this period is very close to 9(!)

What to make of this? Apparently the process of gigantic mutual funds loading up on AAPL is continuing, and its speed depends in part on the decision-making speed of the appropriate committee, and partly by the reluctance of said committees to move the market to much, so that the buy orders to their brokers are spread over weeks (of course, we all know that the market is efficient, trends do not exist, and you can only hurt yourself by acting quickly. Why, you might pull something...)

A brief update on gold

There have been considerable conniptions, consternation, wailing, and gnashing of teeth over the price of gold in recent times. Here is a quick look at reality. Below is the graph of the natural logarithm of the price of gold (measured by its proxy GLD) from its inceptions in 2004 to present day:

You will note that the graph hugs its trend line very closely, and has not really deviated much from its appointed rounds. You do see a wiggle at the very end, but a quick check will reveal that over the entire history, GLD has been gaining 7.2 basis points a day on average, with standard deviation of 13.5 basis points a day (so Sharpe ratio of 0.85), while over the last twelve months, the average return has been 6.8 basis points a day, with standard deviation of 13.4 basis points, for Sharpe ratio of 0.81, so yes, the risk adjusted returns have dropped, but not hugely. Notice also that the graph (at least in the date range shown) shows no indications of a bubble (you can see a mini-bubble in early 2008, followed by the mini-crash in late 2008 -- presumably the mini-bubble was caused by the contemporaneous, and much more substantial,  oil price spike, while the crash was caused by the general panic of the crash of 2008, but not again that the crash was much more mild than the crash in the oil prices (factor of six, peak to trough), and the stock market (close to a factor of two).

Efficient markets?

On January 24 2012, Apple came out with its quarterly data, which completely obliterated analysts projections. AAPL was trading at a P/E multiple of around 12 at the time (already quite low for a company with Apple's growth). Following the earnings report, we saw the following price movement (presumably not over, unless Apple really screws up the iPad 3 badly):

In other words, after a relatively modest 4% jump on the day following the earnings announcement, the stock has been going up linearly. No significant news has come out since the earnings report (there have been reports of the coming iPad 3 for several months, and since, in the post-Steve Jobs era, Apple secrecy is not what it used to be, the rumors have been detailed and consistent. Much has been said of the considerable Apple cash hoard, but that, again, is not news. The question is: since all the relevant information has been available for over a month, why such a slow reaction time, which flies in the face of the efficient markets hypothesis. The only explanation I can come up with is that Apple is large enough that to significantly move the price, very large pension funds and mutual funds have to decide to buy, and whatever these guys are, quick on the uptake is not it. The morals of the story seem to be: not all opportunity lies in $10 cap micro stocks, and those of us with money in (for example) TIAA-CREF should be very sad.

A non-arbed-out trading idea

It is an empirical (but not fully backtested) observation that every time our  fearless leader speaks the market tanks. Some have doubted this on the grounds that correlation does not mean causality, but the first (and quite considerable) example of this phenomenon happened on the occasion of his inauguration, where, as the great man spoke the S&P 500 plunged by around 5% (from 840 to 805), this setting the tone for the rest of his term (I almost said "hopefully his only term", but the alternatives look pretty bleak also).

Marc Faber: Gold is Dirt cheap.

Faber is not a stupid guy.

Your friend igor@rivinfinancial.com has shared a link with you. Marc Faber: Gold is "Dirt Cheap" — Price Could Reach $10,000 per Ounce | Daily Ticker - Yahoo! Finance http://finance.yahoo.com/blogs/daily-ticker/marc-faber-gold-dirt-cheap-price-could-reach-130058708.html Eleven years into a gold bull market, Marc Faber publisher of the Gloom Boom and Doom report still doesn't think gold is in a bubble. Joining us via Skype from in Chiang Mai, Thailand Thursday, Faber told the Daily Ticker's Aaron Task there are fundamental reasons why gold, already nearly 30% higher for they year, [...] Read the full story

Very well put

I
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