Today afternoon when I checked my portfolio, I was a bit shocked to see Apple Inc. (NASDAQ: AAPL) trading around ~ US$97 which was about ~ US$700 last week. Then I realized that its stock split has taken place which was announced a few months earlier. Apple’s stock went for 7-for-1 stock split thus creating more shares to offer to investors. In this split each 1 share holder will be awarded 6 more shares. Simultaneously the price of each stock will be divided by 7. To keep math simple, if you have 100 share worth ~US$70000 on friday, you will have 700 shares worth ~US$100. Your total value of holdings will be same and you will have more number of shares at lower price.
This is after 9 years when Apple’s stock has split. It happened earlier on three occasions, on a 2-for-1 basis in 1987, 2000, and 2005. Apple’s driving officers found telling that Apple wants to reach to more people and within their range. Lower the price, it uplifts psychological barrier in the mind of common investors who think that now its cheap to buy. This is purely psychological syndrome, math remains same. One needs to be careful biasing their decisions based on such events.
We expect that there will be a bullish reaction in the market and more people might jump into buying without much thinking and analyzing fundamentals. Apple is a darling brand of millions of people around the world but it does not mean that darling brand is good enough to give good returns on investments. One needs to watch out.
In recent years, Apple is facing a lot of competitions from other brands which are offering almost similar kind of devices at lower cost. Apple if finding hard to keep innovations going at same pace. After all technology has its own limitations. You might have seen news that Apple is on hunt to find new companies to acquire and keep itself in the race of innovations. However in recent years, you may not see much add ons in Apple products for the price it sells. Here is the hitch!! What if market reacts a bit badly, Apple stock loose its value. It happened in past, Apple stock was trading at ~US$1000 and suddenly it went down and even touched US$360 mark in two years just because of a some huge funds pulled of their investments from Apple and market took a panic. People started selling their shares and overall result Apple stock hit lowest in last few years.
It might be that Apple management is thinking that similar thing might happen after their WWDC which recently concluded as there was not much attraction or planned innovations in coming future. Bringing price below US$100 breaks a psychological barrier in people’s mind and more and more people might attracted to consider Apple as viable investment options. Thus increasing the investors base. However we fee a bit of greediness in this decision. Apple management seem to becoming too greedy which may be harmful in long run. Apple guys watch it out! Greedy destroys big kingdoms!
Now let us look at fundamentals:
Apple stock has strong fundamentals with P/E of ~15.7, dividend yield of ~3% and beta of 0.93. It’s P/B ratio is about ~4.6 which is okay for a technology company. Long term debt to equity is about 14.1 which is not bad either. ROI for last 5 years is about 30%, which is pretty good. However need to watch out its growth prospects. The US$45.5 billion in revenue reported in last quarter is about 4% increase than the revenue reported in the same quarter last year. If we look at upcoming product line, we find that there is no new innovative products coming in next few months. For some reason, company’s business deteriorated rapidly most recently. Not to mention Samsung, Google, LG, HTC etc. are giving though fight to Apple. The company’s profit margin’s have been shrinking since last three quarters rapidly. This gives an alarm!! Something mess is cooking in the management.
Note that Apple is one of our favourite company, but being favourite is because of its products not because of its managements. So, its a question whether I like to put my money in a vehicle which is driven by poor management or rather invest somewhere else where management is efficient and honest enough!
Apple’s current market value is ~4% than its book value. The valuation seems attractive. Its price-to-sales ratio is about 3.17% which is slightly than computer hardware industry ~1.6%. Company’s cash flow is well managed with US$137 billion cash on its books. Impressive!
Since the stock split happened today, it will have too much volatility in the market towards Apple stock. The investors who are seriously thinking to invest in Apple may wait for the tide to go over. After that there will be clear indication about who much water is beneath. We expect Apple may dip down in range to 60~70 before starts gaining upwards.