By BRETT ARENDS
Before you get ready for the iPhone 5, are you ready for Apple (AAPL)
The tech titan jumped again yesterday to a record high of $665. At these levels it is valued at $620 billion. As you will hear everywhere, this makes it "the most valuable company in history."
Bull? Bear? If you're an investor, here are ten things to chew on.
1. No, Apple isn't really the most valuable company of all time. As Howard Silverblatt, senior analyst at Standard & Poor's, points out, you have to adjust for inflation. When you do, he says, Microsoft's $620 billion valuation in December, 1999 still takes the prize. By my math, Apple today would need to hit about $880 a share to beat it.
2. Apple's true value is not as challenging as it appears. That's because, although it would cost you about $665 billion to buy up all of the company's stock at these prices, you could immediately offset that purchase by pocketing the vast reserves in the company's piggybank. A look through the latest filings reveals Apple has $52 billion in current assets, plus $90 billion in marketable securities, less $51 billion in liabilities. Net-net, you'd have about $90 billion left over, meaning the enterprise value of the company is a more modest $533 billion. (I'm ignoring tax. Ah, if only we really could).
3. You can make the case that Apple still isn't crazy-expensive. The enterprise value is about 13 times consensus earnings for the fiscal year ending next month, and about 11 times those for the following year. Hitting those earnings targets, of course, is another matter. The risks include further economic turmoil, and price pressure from competition.
4. Apple investors are still in good company. As of July 31, Ben Inker, the cautious and sensible chief investment officer at white-shoe fund shop GMO, had Apple as the ninth biggest holding in GMO's "US Quality" portfolio.
5. The Standard & Poor's 500 index is up about 13% so far this year. But if you don't own Apple, you're only up about 11%. If the fund management industry runs true to form, every manager who doesn't own Apple stock is about to rush out and buy it so he doesn't get fired. In the short term, at least, this may yet drive the price higher.
6. Apple investors do need to be aware that the biggest company in the world has a horrible tendency to prove a poor investment over the long term. Past holders of the title include General Motors, General Electric and Microsoft. ExxonMobil, the last cup holder, is down about a fifth since peaking in 2007.
7. Apple investors may marvel at their company's brilliance, but the most important factor in its success was the sheer incompetence of its competitors. I must confess that I never imagined that so many highly paid people at so many big technology companies would be so astonishingly, staggeringly inept. In a just world, their stockholders might have a class action suit against some of the CEOs. Apple stockholders must hope that incompetence continues. Logic and math says it can't forever. But I thought that four years ago.
8. Every fashion and fad felt like it would last forever. None did. If today's obsession with smartphones and tablets persists, it would be the first such instance in human history. The more likely scenario is that sooner or later these things will be considered about as boring as digital watches, and priced accordingly. Young Apple investors, in particular, should be aware that digital watches were once considered the most amazing thing ever.
9. For the enterprise value of Apple, you could instead buy 100% ownership of the following companies: Boeing, Du Pont, Deere & Co., Estee lauder, Raytheon, Kellogg, H.J. Heinz, Gap, Macy's, Campbell Soup, Tiffany & Co., Darden Restaurants (Olive Garden, Red Lobster et al.), Plum Creek (6.6 million acres of U.S.timberland), the NYSE Euronext stock exchange, U.S. Steel, and Goodyear Tire & Rubber. Yes, all of them. Together. Oh, and you'd have about $200 billion left over.
10. Apple and today's other jumbo stocks make a mockery of the idea that your index fund is broadly diversified. If you buy a Standard & Poor's 500 Index fund, you may think you are spreading your money across the biggest 500 companies in the market. But you're not, really. More than one fifth of your dollars goes into the ten biggest stocks (Apple, Exxon Mobil, Microsoft, Wal-Mart, IBM, General Electric, Google, Chevron, AT&T and Berkshire Hathaway). You are investing more money in those ten companies than in the smallest 300. Indeed you are investing more in Apple alone than in the bottom 100. Make of it what you will.