Apple Stock: Goodbye, Growth; Hello, Income

When it comes to Apple (NASDAQ: AAPL  ) , its revolutionary products and its iconic founder, Steve Jobs, have usually been the places where the media has shone its spotlight. The curious case of Apple stock itself, however, is almost as interesting. For the past decade, it has defied gravity, climbing up 5,825%. But the most intriguing part of the Apple stock story began with Jobs' death in 2011, and it carries on to the stock's confrontation with the Law of Large Numbers today. A close look at the stock's story reveals just how mad the market really is.

An expectation for perfection
"Apple is a normal company. Why does the public constantly expect them do the impossible?" vented Slashdot commenter "pi radians" more than a decade ago. The quote was buried in a discussion forum titled "Apple releases iPod," dated Oct. 23, 2001. At an invitation-only event, Apple had just released its new MP3 player.

Little did pi radians know that Apple was just getting revved up. The company, and Apple stock, surely went on to do the impossible, blowing away investor expectations. The iPod dominated the MP3 player market and was the driving force in the decline of the CD.

As Apple continued to astound consumers, Apple stock followed suit. The stock rode the waves of one successful product launch after another, including the iPod Mini in 2004, the iPod Touch and iPhone in 2007, and the iPad in 2010. An investor who bought $100,000 in Apple shares 10 years ago would have almost $6 million today.

Two years of Apple stock madness
Then, on Aug. 24, 2011, Jobs resigned from Apple, as his illness made it impossible for him to "meet [his] duties and expectations as Apple's CEO." Less than two months later, Jobs died.

Not long afterward, Apple's stock began to soar as the company's iPhone and iPad line continued to obliterate expectations. "Apple's monstrous quarter" was common earnings-release headline lingo. And now, after a meteoric rise to $700 per share in September 2012, Apple stock now hovers near its 52-week low, around $428.

Apple's 5,825% rise over the past year had little to do with investor optimism. In fact, the company's earnings and free cash flow growth both outpaced the growth in the stock price. But what makes the Apple stock story really interesting is that even at $700 per share, Apple appeared to be fundamentally cheap, trading at about 16 times earnings. As a comparison, Google (NASDAQ: GOOGL  ) trades at 24.5 times earnings.

It's all about expectations
When it comes down to it, the iPhone 5 didn't live up to the Street's expectations. Google's free Android mobile OS has empowered an onslaught of competing devices at lower price points. Many consumers aren't as willing to shell out premium dollars for a smartphone when they can find a cheaper alternative elsewhere.

Ultimately, stock prices are all about expectations. Investors expect Google to continue to grow its revenues and earnings and, hence, its business, so the stock trades at a nice premium of 24.5 times earnings. In other words, investors expect Google to grow into its stock price.

If there's any chart that explains why Apple has lost its nice price-to-earnings multiple of 16, when the stock traded at an all time high of $700, it's this one:

AAPL EPS Diluted Quarterly YoY Growth Chart

AAPL EPS Diluted Quarterly YoY Growth data by YCharts.

Growth rates exceeding 25% no longer seem attainable. In three of the past four quarters, Apple reported decelerating year-over-year growth rates in EPS.

But the tension persists. Analysts, on average, expect Apple earnings to increase at 20% annually for the next five years. At just 10 times earnings, however, this expectation isn't priced into the stock. On Apple's Motley Fool CAPS page, 61 of 61 analysts rank Apple stock as an "outperform." Even so, the market refuses to pay a premium now for an expectation of growth down the line.

Officially an income investment?
Now investors are wondering what's next. Is Apple stock exiled from growth portfolios and reassigned to the income investment community once and for all?

With a very likely dividend boost just around the corner, Apple might morph into a great dividend stock. But will it ever be a growth stock again? Let us know your thoughts.

There's no doubt 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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Editor's note: A previous version of this article incorrectly stated an investor who bought $1,000 in Apple shares 10 years ago would have almost $6 million today. The Fool regrets the error.


Read/Post Comments (14) | Recommend This Article (9)

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 April 07, 2013, at 6:29 PM, urpathetic wrote:

    you people are idiots

    I hope you all bought apple at $700

    I watched you fools cheerleader this stock all the way down to $419 hoping someone would be stupid enough to buy so your shares would go up

    you should be ashamed of yourselves

    apple died with steve jobs

    Tim cook is an idiot

    every time he opens his mouth the stock reacts like a falling knife

    I click onto an article for news and as soon as I see it you motley fools I delete it automatically

    I wish there was a way I could block you from my newsfeed

  • Report this Comment On April 07, 2013, at 6:39 PM, myeerah wrote:

    Your 100% correct......URpathetic!! Lol!!

  • Report this Comment On April 07, 2013, at 6:45 PM, jordanwi wrote:

    Holy, sour grapes. Yeah, historically Apples been a VERY poor investment, you're right. Tim Cook really does seem like a moron, setting records every quarter.

  • Report this Comment On April 07, 2013, at 7:12 PM, demodave wrote:

    Too soon.

  • Report this Comment On April 07, 2013, at 7:16 PM, urpathetic wrote:

    Tim cook hasn't set anything

    apple sales are still riding on the momentum of innovation under steve jobs leadership

  • Report this Comment On April 07, 2013, at 7:21 PM, demodave wrote:

    "Growth rates exceeding 25% no longer seem attainable. In three of the past four quarters, Apple reported decelerating year-over-year growth rates in EPS."

    Incorrect! October 2012 growth is greater than July 2012 growth. That's accelerating growth. At the very least, you must be able to get that stuff correct. Even December 2012 was growth. Very slow growth, but still growth.

    I'm disappointed that this (theoretically) edited Fool post was able to get through based on incorrect content.

  • Report this Comment On April 07, 2013, at 7:36 PM, urpathetic wrote:

    You think that's bad? look at the math they put up

    10 years ago the stock traded at $15

    how is a $1000 investment then worth 6 MILLION DOLLARS today ?

    $1000 @ 15 a share = 66.6 shares

    66.6 @ all time high of $700 is only $46,620

    or am I missing something?

  • Report this Comment On April 07, 2013, at 7:40 PM, TMFDanielSparks wrote:

    @Demodave,

    Thanks for your comment. I think you're mis-reading that sentence. The growth has been "decelerating" when compared to the same quarter one year earlier.

    What you are saying is that the year-over-year growth rates between July 2012 and October 2012 were up sequentially. But what I'm saying is that 3 of 4 quarters reported growth less than the growth reported in the corresponding year-ago quarter. In fact, for the most part, these growth rates were down substantially.

  • Report this Comment On April 07, 2013, at 7:53 PM, Mjpbfool wrote:

    UrPathetic - The percent rise seems outlandish but I think one thing you didn't factor in was stock splits. They had a bunch in the early/middle of last decade.

  • Report this Comment On April 07, 2013, at 9:15 PM, Venom991 wrote:

    Anyone else think that this is what Tim Cook wants so that he can buy back the company at an extremely cheap price?

  • Report this Comment On April 07, 2013, at 9:22 PM, berthalard wrote:

    Per Yahoo! Finance, AAPL share price adjusted for stock splits and dividends closed at $7.14 10 years ago on 4/7/03. AAPL share price as of Friday's close was $423.20. This represents a total return of 5827%. $1000 invested 10 years ago would be worth $59,270, a far cry from $6 million. An investment of $100,000 would have been required to achieve the nearly $6 million result stated in the article.

  • Report this Comment On April 07, 2013, at 9:22 PM, crikescrikes wrote:

    $100,000 ten years ago (not $1000) would have been 6 million ($7/share in April 03). the author just made a mistake that wasn't caught by the editors. That's 5 doubles!! nothing to complain about.

    in other words, investors were rewarded well!!!

  • Report this Comment On April 07, 2013, at 9:29 PM, RaulR2 wrote:

    To the respectable Jobs' widow urpathetic:

    Dear Mrs Jobs, You do not seem eager to block MF articles from your newsfeed as you posted 3 times on this one and seem just interested in writing offenses with a very vulgar language.

    Why not you deleted this MF article as you claimed?

    You should be very ashamed of yourself because of your vulgarity and dirty brain..

  • Report this Comment On April 07, 2013, at 11:51 PM, SimchaStein wrote:

    What's the point? Look at Apple's stock price 2008 through 2009. Than ask if the stock market action is a good predictor.

    BTW: AAPL and XOM are within a buck (Billion) of being the top market cap companies - public.

    And people still say "beleaguered"?

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