Can Steve Jobs and iCloud Make Apple a Growth Stock Again?
Apple doesn't trade like it's a hot tech stock these days and neither Steve Jobs' appearance at its annual Worldwide Developers Conference nor Apple's new iCloud service are likely to change the market's perception anytime soon.
Despite being up about 35 percent over the last year, Apple (AAPL) shares should be a lot higher, if history and Wall Street estimates are any guide. But Apple shares don't fetch the same kind of premium they used to and after Apple and Steve Jobs' show Monday it's hard to see why the stock would be rewarded with a growth multiple again -- at least in the short term.
One huge weight on Apple's stock has been concern over the health of Steve Jobs. There's no denying the power of his personal brand, says BNET's Ira Kalb, and investors are rightfully worried. Jobs has been on medical leave since January. Although it's certainly good news he made his first public appearance this year, as MoneyWatch's corporate cousin CNET noted in its live coverage, Steve Jobs does not look well and did not spend much time on stage.
Then there's the lack of a "wow" factor out of Apple's most recent big news -- the launch of its much anticipated iCloud service. MoneyWatch's Conrad de Aenlle says there's considerable skepticism out there about Apple's iCloud idea. CNET reports that, as expected, iCloud stores all your content and wirelessly pushes it to all your devices. But that's neither groundbreaking nor does it create a new barrier to entry for competitors.
Which brings us to Google (GOOG). Also worrisome for investors is that Google's Android operating system for cellphones is crushing the iPhone in market share. When Apple went over the latest updates to the iPhone platform (iOS 5) Monday, CNET commenters were quick with the snark, as in "show me something Android doesn't already do."
Jump back 20 years and it looks like Apple vs. Windows all over again. Could it happen to iPad vs. Android in the cellphone and tablet business too?
Is Apple Still a Growth Stock?
Wall Street analysts, on average, see Apple's stock hitting $450 in the next 12 to 18 months, according to data from Thomson Reuters. They also expect Apple to increase its earnings at an average clip of 20 percent a year over the next five years. And yet investors aren't willing to pony up for that expected growth. That is, they are unwilling to pay more per share of earnings -- a hot-tech-stock-like premium -- for that forecasted profit growth.
Don't believe it? By both trailing and forward price/earnings ratios (P/E), Apple is cheaper than Procter & Gamble (PG). P&G makes toothpaste, folks. And razor blades and diapers. It pays a dividend and has been around for about a million years. It's no growth stock.
In a recent post, I wrote that based on Apple's relative valuation alone, the stock appears destined to go up, up, up. Based on either it's trailing P/E of 16 or forward P/E of 12, Apple is wallowing at more than a 40 percent discount to its own five-year averages, according to data from Thomson Reuters. Put another way, all things being equal, Apple would have to rise more than 40 percent just to get back to what investors "normally" pay for its shares.
So what gives? There are the challenges noted above, but also perhaps the law of large numbers is catching up to Apple, too. It's easier to grow quickly when you're small, and maybe Apple's massive market capitalization makes it a hard swallow for investors looking for hot growth.
At around $315 billion, Apple's market cap makes it the second biggest publicly traded company in the U.S. after Exxon Mobil (XOM). Indeed, Apple is so big that its market value is larger than Microsoft (MSFT) and Intel (INTC) combined. As Microsoft and Intel have proven, sometimes earnings valuations come down as a tech company gets too big.
Whatever the reasons for Apple trading like it is, concern over Steve Jobs' health, questions already dogging the new iCloud service and the Android wars aren't likely to help Apple get its growth-premium groove back -- at least not soon. For all the bad news, the iCloud does have a silver lining: Apple shares seem to fully reflect the obstacles the company faces. Despite climbing nearly 300 percent since the market bottom in 2009 (the broad market, by contrast, has not-quite doubled), Apple is no Linkedin. Yes, based on relative valuation, Apple still looks like a bargain and much more likely to help rather than hurt long-term tech investors.
Image courtesy of Wikimedia Commons.
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