Apple Stock Takes a Wild Ride After iPad Unveiling
Apple's stock soared after the iPad, a hybrid iPhone and netbook computer, was unveiled Wednesday and then plunged with the rest of the market Thursday morning. That shows the best and worst aspects of investing in Apple, all in less than 24 hours.
Apple is a phenomenal company, but it has to do business in the same fragile economy and stock market as everyone else. No matter how brilliant Steve Jobs, Apple's chief executive, is, the stock is vulnerable to a second dip into recession; $499 for the basic iPad will attract a lot of buyers, but fewer if the economy tanks anew.
The share price could also fall victim to perhaps the biggest threat that any asset faces: excessive expectations.
For the last decade Jobs has managed to do everything right, from the various iterations of the Mac to Pixar to iTunes and the iPod and the iEverything else. He has a knack, maybe better than anyone else does, for identifying a need in the marketplace, often one that consumers never realized they had, and designing a product or service to fill it.
As the MoneyWatch house contrarian, I'm supposed to express disdain for anything as successful as Apple. But while the stock is close to all-time highs, it doesn't look expensive.
By one popular valuation measure, the PEG ratio (the price-earnings multiple divided by the annual earnings growth that analysts expect over the next five years), Apple appears cheap. Its PEG (lower numbers are better) is 1.06, while those of Hewlett Packard, Dell and Microsoft range between 1.16 and 1.46.
But the ratio is susceptible to changes in circumstances. The five-year earnings growth estimate may prove to be way too optimistic if a new rival comes along and shakes up one of Apple's markets or if an old rival proves more adept at fending off its competitive threat.
Apple is the kind of company that investors either love or hate, marveling at its success or awaiting its comeuppance. The true contrarian play might be just to leave the stock alone.
If you own it keep it, but also keep an eye out for signs that earnings expectations have become unreasonable or, worse, that Jobs is losing his touch. If you don't own it and you'd like to, you might want to wait for a significant pullback to hop onboard.
