Tuesday, April 24, 2012

An Apple a Day?

First off, I must confess that I am not one who analyzes individual stocks or has the aptitude (read: patience) to review P/E ratios, growth rates, and the like. However, as an economist who constantly reviews statistics, there are current elements of Apple’s valuation that deserve comment from a broader perspective.

In the interest of full disclosure, I have Apple products, and most likely will purchase additional Apple gadgets at some point in the future. They are not my favorites, but nonetheless, they are part of my technology wardrobe. To this point, however, I can live without my Apple products. In fact, during a recent trip to the West Coast, I was forced to work without an iPad or an iPhone, relying only on my Blackberry and my laptop. And I was - yes, it’s true - just fine.

An Apple a day, it seems, is not what the doctor ordered. Although Apple’s products are cool and life-improving, they are not life-sustaining. I don’t mean this as a shot at Apple, but rather at society. We can get along without i-This and i-That. A recent poll asked people if they would rather have an iPad or a share of Apple stock, which at the time was trading over $600 a share. My answer, although not one of the choices, would be, “Give me the 600 bucks!”

Therein lies the “core” of this story. Apple hit a market cap of $600 billion, which is equivalent to $2,000 for every man, woman, and child in America, or almost 5% of GDP. Hmmm. It just seems doubtful and even mathematically unlikely that this market cap could be sustained, even as Apple continues to sell cool products, generate profits, and hoard cash.

It reminds me of trend extrapolations made in years past. When I was in grade school, I heard warnings about the population explosion, how there would be no room left in the country. On that West Coast trip, however, as I looked out the window, I saw a great deal of open, unpopulated space.

In fact, U.S. population, which reached 308.7 million people in 2010, was up 9.7% over the previous decade, a slower growth rate than in the past. Add in the aging of the baby boomers and a few other demographic facts, and the U.S. could see a significant decline not only in its growth rate but in its overall population in the decades ahead, according to the U.S. Census Bureau. (Probably not a good head wind for Apple stock).

When I was in college, the student body attended an emergency health meeting on campus to discuss the AIDS crisis. The moderator told us, “Look to your right, to your left, in front of you, behind you. One of these four people will die of AIDS by the end of the decade.” Thankfully, that forecast was wrong.
My point is, we can’t take past trends, positive or negative, and project them on the same trajectory for the foreseeable future. In other words, apple trees grow--but not to the sky.

From where I sit, Apple is a fine stock and will probably perform like most other fine stocks, which are mostly influenced by the overall market movement. As readers who follow Astor’s philosophy, you will recall I believe that the equity market is influenced by economic fundamentals.

Will Apple continue its exponential performance of the past? Not very likely. In fact, I would not be surprised if it regresses a bit to the mean.

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