Is Apple Overvalued?

On Wednesday, April 23, 2014, Apple reported Q2 2014 earnings after markets closed for the day. Net profit for the quarter posted a comparative increase, and exceeded analyst estimates. Sales, which were generally assumed to be flat, comparatively, actually increased by approximately 5%.

Despite these results, which can only be fairly called subdued, investors drove the stock price up by over 7% after hours. Does this activity make sense? Or are investors basing their share purchases on a set of possibly suspect assumptions?

Anyone positing some future performance for Apple will want to research the performance of the iPhone product line. The iPhone is the biggest money maker for the business, so any further improvement to sales and/or profitability will likely depend, to some extent, on the performance of this product.

Where is there room for iPhone smart phone sales to grow further?

There is ample indication of a saturated market for smart phones, at least in the U.S. and western European markets. Carriers, who, in the past, opted to subsidize the cost of these devices for consumers are abandoning the strategy (T-Mobile appears to have lead the U.S. carriers in this new direction. AT&T has taken a similar path and reported some results in its latest quarterly earnings report. Verizon has announced similar plans. Sprint is likely not to be far behind).

If surveys are credible, smart phone consumers are tired. Handset manufacturers (including Apple) announce new features, which amount to subtle improvements in operation, or performance. A major breakthrough in technology is needed, but there isn’t any indication any of the manufacturers will announce one anytime soon.

So the room for growth in this market, in my opinion, is to be found in emerging markets and at the low end of the acquisition cost for these phones. The present iPhone is not a contender in these promising markets. Therefore, it doesn’t make sense (at least for me) to forecast a substantial increase in sales for this product anytime soon.

One last word on this product: Consumers are likely to value any substantial enhancement to Smart Phone speech features. Drivers include law enforcement, and a host of factors specific to mobile device operation. It’s simply not possible to operate even a touch screen while navigating a turnstile to board a train, etc. But managing the device via a spoken command does make sense.

In my opinion, consumer appetite for a full featured set of audio commands can justify an increased market, even at the high end. But it may be the case Microsoft® has assumed the position of market leader in this space, based on public announcements made at its recent, annual “Build” conference, held this year in San Francisco.

Tablet Sales are Growing Rapidly, Apple is the Leader and Looks to Maintain Its Dominance

The market for tablet computer is growing rapidly, perhaps at a faster pace than the smart phone market. Apple dominates this market. The iPad Mini is a strong sales performer, ostensibly as the result of its convenient size, Retina® display and cost to the retail consumer. Perhaps this market presents Apple with a solid opportunity to build some of the enormous growth in sales and earnings to justify further increases in its valuation.

But Apple has not announced any new features for the iPad likely to be received as something “really new”. On the other hand, major competitors like Samsung, with tablets running on the Android O/S are determined to capture market share; so they continue to innovate.

Certainly Microsoft’s recent announcement of Office availability for the iPad is a positive development for Apple. But Intel’s Atom Bay Trail CPU and chipset has started to make sense for big enterprise PC OEMs (including HP). It may soon make more sense for enterprise customers to opt for Windows Tablets than to continue to purchase iPads with Office. Note: Microsoft wins either way.

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Based on the above points, I think Apple is over-valued at its current stock price.

Disclaimer: I’m long Microsoft and have no position in Apple

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

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