Some Apple Bears Can't Do Math

Part of being a Fool is considering a wide range of opinions with the hope that doing so will make us better investors. That's why we Fools will sometimes have respectful duels and take opposing sides. However, there are times when "pundits" just need to be called out.

Even though I'm a big Apple (NASDAQ: AAPL  ) bull, I'll acknowledge the bearish cases if there's a solid thesis underlying the pessimism. There aren't a whole lot of Apple bears out there, but they do exist. Two in particular, though, make claims that just don't add up.

Bear No. 1
Heritage Capital's Paul Schatz was on Yahoo! Finance's Breakout blog this morning arguing that the recent Apple selloff was just a preview of more downside in store for investors.

Shares have seemingly bottomed and bounced off lows near $506 in November, and Apple has recovered about 14% from those prices. That relative low represented an incredible pullback of $200 per share, or nearly 30%, from the all-time highs set in September.

Schatz believes the drop is "the first leg down of a multiyear decline, which I think ends up knocking 50% to 70% off the stock." Eventually, he thinks Apple will fall below $400, in which case investors should consider any pop a selling opportunity to get out before the iEmpire crumbles. Apple's meteoric rise of more than 200% in the past five years is "irrational exuberance," he figures.

Part of his bearishness is that the macro picture is going to be problematic, regardless of how the fiscal cliff scenario plays out, and "Apple's gonna take it on the chin."

There's not much else underlying that call. A 70% loss from the high would put Apple's share price around $210, which would put Apple's valuation under $200 billion. That's less than longtime rival Microsoft (NASDAQ: MSFT  ) is currently worth at $222 billion, and it's in the midst of a major transformation to be like Apple anyway, since its core Windows business is in a precarious position along with the PC market. It's been two years since Microsoft was worth more than Apple, and I find that unlikely to change anytime soon.

Bear No. 2
It's time to check in again with Ed Zabitsky of ACI Research, a two-person shop based out of Toronto. Zabitsky has maintained a $270 price target on Apple for the past two years. He recently reiterated his stance to The Telegraph, saying the recent pullback makes him "less of an outlier." He went on to say: "Change is de rigeur in technology. The amazing thing is that things did not change for so long. Apple was able to remain dominant, not by luck but by skill."

I'll give Zabitsky a little bit of credit, though: He's made some conceptually sound cases on why Apple is doomed, such as the threat that carriers will cut iPhone subsidies. He just turned out to be dead wrong. In his desperation, he then somehow reasoned that HTML5, a technology that Apple supports, would herald in a new era of open apps and iDevice sales would plummet. Still wrong.

Native apps have far better performance than HTML5 Web apps. Just ask Facebook's (NASDAQ: FB  ) Mark Zuckerberg, who said, "The biggest mistake we made as a company was betting too much on HTML5, because it's just not there yet." When Facebook went native with its iOS app, it saw massive improvements in performance.

Math, schmath
At $270, Apple would be trading at 6 times trailing earnings and 4.6 times forward  earnings. At $210, it would be trading at 4.7 times trailing earnings and 3.6 times forward earnings. That's cheaper than Dell (UNKNOWN: DELL.DL  ) , a company still trying to find itself in the new era of mobile computing, which trades at 6.8 times earnings.

That's saying something that a monstrously profitable company at the forefront of the biggest paradigm shift in consumer computing in generations should trade at a lower earnings multiple than a commoditized PC maker with razor-thin margins currently embarking upon an uncertain transition into becoming an enterprise IT player.

And it sounds rather unreasonable for a company that just grew net income by 61% and booked a profit of $41.7 billion in the past 12 months alone. Looking at cash generation, operating cash flow last year was $50.9 billion (up from $37.5 billion in fiscal 2011), and total cash has more than doubled over the past two years.

Even if we were to assume Apple puts up zero earnings growth next year, that would be more than $80 billion in profits in two years. Its total cash in the bank at that point would probably total no less than $150 billion by itself. This is a company that Schatz thinks is worth only $200 billion and Zabitsky values at $250 billion? These figures don't add up.

There is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and, more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (8) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 04, 2012, at 9:10 PM, BradApple wrote:

    Excellent commentary! It's hard to believe that analysts like Schatz and Zabitsky are taken seriously by anyone, given how flawed and shallow their analysis is.

  • Report this Comment On December 04, 2012, at 10:07 PM, EquityBull wrote:

    To do the math correct you have to back out cash on that 270 to get enterprise value. 130/share in cash off that 270 gets you to 140. With 50/share in eps this year and next year at potentially 60 the stock would then trade for a mere 2.5 to 3 times earnings (ex-cash).

    Better yet if you push out just one year apple has 170/share in cash off that 270 which is 100. At 50/share that would be a PE of 2. Apple would have long gone private, been acquired or been taken out as LBO.

    These analysts put out absurd stuff just to get their name out there. Let the shorts grab on to whatever headline they want. In the end when apple puts up the numbers they will all shut up and be long forgotten.

    You don't see anybody who was predicting doom and gloom when apple pulled back from 220 to 80 couple years ago talking about how great their calls were. No accountability for pundits or analysts. Anyone can be an analyst or pundit, lets face it.

    I'm a pundit and an analyst as much as any of these no name guys. I hereby slap my $1200 price target on apple. I see 60/share for 2013 with 170B in cash by end of '13. Puts apple at a cheap 16 multiple still at a discount to its 28% growth

  • Report this Comment On December 04, 2012, at 10:52 PM, SuntanIronMan wrote:

    Maybe I'm missing something, but I don't understand why you have pictures of David Cross with a picture of Paul Schatz.

    The photo background? Is that the reason? I have yet to read anything past that photo, as I just can't understand what that has to do with anything.

  • Report this Comment On December 05, 2012, at 1:43 AM, ConstableOdo wrote:

    Apple can easily fall if investors have no interest in the company. The stock is constantly being manipulated and that makes it huge risk for average investors. Why take the risk with Apple when any number of stocks will give you better returns?

    Priceline, Amazon, Intuitive Surgical, Netflix, to name a few stocks, are all doing better over the last six months than Apple. In fact, Apple's share price is lower now than it was in April of this year. It's as though Apple has stopped earning revenue and profits. Of course, it hasn't, but if a company that makes money doesn't give any returns to shareholders, then what's the point of investing in the company. The cash hoard grows larger by the quarter and goes untouched. The executives are earning huge salaries but none of that money is going to shareholders.

    Apple shares continue falling on every ridiculous rumor around. Analysts are always coming out of the woodwork downgrading Apple for all sorts of reasons and Apple shares drop. Analysts downgrade Apple more than they downgrade Amazon and Amazon is losing money. Apple may be a fine company and makes good consumer products, but it appears to be an extremely lousy investment for shareholders. Apple shareholders are being taken for a ride as whatever money Apple makes goes up in smoke.

    Apple shareholders will probably never see $700 again and I feel sorry for those that were enticed into buying at that price because some fools said Apple was going to $750 or $800. They got burned and are probably never coming back. Apple is a very untrustworthy stock for investors to buy.

  • Report this Comment On December 05, 2012, at 1:56 AM, SuntanIronMan wrote:

    I see the pictures are now removed. Just for the sake of my curiosity, why were they (and that preceding sentence) there to begin with? I still don't understand the reference.

  • Report this Comment On December 05, 2012, at 8:35 AM, TurbulentTime wrote:

    I want Apple to fall more before it finally rebounces. I love the momentum trades which I have been able to pull off over the last two months for Apple, up and/or down.

  • Report this Comment On December 05, 2012, at 3:52 PM, Mathman6577 wrote:

    The Apple bears are happy today w/ the stock down 6%.

    Do they really think Samsung is a better company ?

  • Report this Comment On December 05, 2012, at 5:40 PM, TheRealRacc wrote:

    Microsoft's intrinsic value, outside of the economic markets, is exponentially (and unfathomably) higher than Apple's. Apple is a consumer company. It should be grouped with other retail brands. Just because Apple uses a microprocessor doesn't make it a Technology stock.

    Microsoft, EMC, F5, CSCO, the list goes on. The value these companies bring to their respective customers is in a completely different realm than Apple.

    There is a trillion-dollar market for tablets and other gadgets. It is no wonder that the market mover Apple gained so much, so fast. But this consumer market is akin to quicksand. Enterprise technology products and services stand strong in concrete.

    An iPad owner today can be a Nexus owner tomorrow, and Apple is no more. It would take 10 years for Microsoft to disappear in similar fashion.

    Apple traded at $700 on speculation that is market-share graph would be a straight line up. It will be anything but that. We now sit at $500. If AAPL doesn't take from Android in the foreign markets, $300 is more likely to come before we see $700 again.

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