After Apple's fall, is it time to buy or sell?

Aug 26, 2011 By BERNARD CONDON , AP Business Writer
An Apple MacBook is seen on display as customers browse an Apple retail store in central London, Thursday, Aug. 25, 2011. Steve Jobs resigned as CEO on Wednesday, saying he could no longer handle the job and would continue to play a leadership role as chairman of the board. (AP Photo/Sang Tan)

(AP) -- Should you buy or sell Apple?

After the announcement that is stepping down as , investors pushed Apple's down 0.7 percent on Thursday. By contrast, analysts reacted with predictable optimism: Buy - a lot.

So who is right? The pros or the investors?

The short answer may be the pros, though the stock is probably not the bargain that many of them assume.

One popular way to value a company's stock is to look at how high it is trading relative to its earnings per share. It's a rough measure, but it does show that Apple is not much more expensive than the average . At Thursday's closing price of $374 per share, Apple is trading at 12 times its expected earnings over the next 12 months compared with 11 times for the Standard & Poor's 500 index.

Translation: For every dollar you spend on Apple, you should expect roughly the same earnings as you would get on the average company.

The difference, of course, is that Apple has a tendency to beat expectations and send its stock soaring. It's up 16 percent since Jan. 1, and it briefly topped Exxon Mobil this month as the most valued U.S. company.

One reason the stock trades at a discount to its stellar reputation is a bit counterintuitive: The company has been so successful at producing hot products, starting with the iPod in 2001, then the iPhone in 2007 and last year's big hit, the iPad. The problem is, no one knows if the company can keep this up, especially now that its visionary CEO is resigning (though he will stay as chairman). If Apple doesn't produce more big sellers, estimates of future earnings may prove too high.

But Shaw Wu, an analyst at Sterne, Agee & Leach, says investors are confusing the image of Apple as an innovative, rebel company with the less colorful, but reliable profit maker that it is.

"It's not just a company producing hit products," Wu says. "The earnings have become more predictable."

Despite the popularity of its iPhone, Wu estimates that it still only accounts for 5 percent of cellphones in the world. He believes the iPhone's market share could triple to 15 percent, especially given the opportunity in China, where the company has started selling. He notes that Nokia at its peak had 40 percent of the cellphone market.

Similarly, Wu is bullish on Apple's Macs and iPads. He says they now account for more than 10 percent of the world's computers. He expects that to double. He says that Hewlett-Packard, at its peak, captured 25 percent of the PC market.

Both Nokia and HP are now hurting in part because of Apple's successes with the iPhone and the iPad.

"China is the next big frontier," says Wu, who's been recommending the stock since it was $40. "It's where the next $100 (jump) could come in the stock."

There are plenty of reasons for doubt, however. Even if Jobs had stayed on as CEO, the company faced numerous challenges. Rival phone makers such as Motorola, Samsung and LG Corp. are making inroads using Google's Android operating system for smartphones, which are just about as easy to use as Apple's iPhone. And the success of the iPhone and rival smartphones, which can play music and video, means fewer people need iPods from Apple.

Then there's the challenge of mathematics. As a company gets bigger, it's harder to get the same percentage increase in earnings that investors have come to expect.

Apple earnings have been growing an average of 60 percent annually over the past five years. But can investors really expect that to continue with annual earnings estimated to hit $26 billion the fiscal year that ends in September?

Even Apple fans such as Timothy Ghriskey, co-founder of Solaris Asset Management, which owns Apple stock, notes that selling iPads and iPhones to the Chinese and coming out with new versions of old products will only go so far.

"There is predictability to the two or three years out. But beyond that? Who knows what the next handheld communications device is going to be?" he says. " has to keep coming up with the (next) new thing."

To bulls, though, the benefit of buying stock now is that have already priced a bit of this danger into the stock.

"There's always the risk they'll lose their mojo, their magic," says Wu. "But that's why it trades at 12 times."

Explore further: Twitter buys data analytics partner Gnip

1 /5 (2 votes)
add to favorites email to friend print save as pdf

Related Stories

Apple rockets to most profitable quarter ever

Jan 25, 2010

(AP) -- Apple's holiday quarter was especially sweet this year, but Wall Street's response was muted as investors puzzled through an accounting change and lighter-than-expected iPhone sales.

Recommended for you

Yahoo sees signs of growth in 'core' (Update)

11 hours ago

Yahoo reported a stronger-than-expected first-quarter profit Tuesday, results hailed by chief executive Marissa Mayer as showing growth in the Web giant's "core" business.

Twitter buys data analytics partner Gnip

15 hours ago

Twitter says it has bought its data partner Gnip, which provides analysis of the more than 500 million tweets its users share each day—to advertisers, academic institutions, politicians and other customers.

Zebra to spend $3.45B on Motorola business

19 hours ago

Zebra Technologies is spending more than $3 billion to buy the enterprise business of Motorola Solutions in a considerable expansion that is both technological and geographical.

Relativity's last-minute bid for Maker rebuffed

23 hours ago

Relativity Media, a film financier and movie distributor, was rebuffed in a last-minute bid for Maker Studios, the YouTube video creator that had agreed to be bought by The Walt Disney Co. last month.

User comments : 0

More news stories

Tech giants look to skies to spread Internet

The shortest path to the Internet for some remote corners of the world may be through the skies. That is the message from US tech giants seeking to spread the online gospel to hard-to-reach regions.

Patent talk: Google sharpens contact lens vision

( —A report from Patent Bolt brings us one step closer to what Google may have in mind in developing smart contact lenses. According to the discussion Google is interested in the concept of contact ...

Wireless industry makes anti-theft commitment

A trade group for wireless providers said Tuesday that the biggest mobile device manufacturers and carriers will soon put anti-theft tools on the gadgets to try to deter rampant smartphone theft.

Astronomers: 'Tilt-a-worlds' could harbor life

A fluctuating tilt in a planet's orbit does not preclude the possibility of life, according to new research by astronomers at the University of Washington, Utah's Weber State University and NASA. In fact, ...