By BRETT ARENDS
You're a stockholder in Apple. And -- how should I put this? -- you're freaking out.
Your wonderstock has collapsed by 25% in the past three months. That amounts to $170 billion in market value. (To put this in context, the amount of value Apple has lost is three times the entire market value of Boeing.)
Should you be panicking? Should you sell? Stick your head under the pillow?
Here's the bad news -- and the not-so-bad news.
The first piece of bad news is that Apple stock is still way too popular among investors and analysts. The conventional wisdom is that this is just a temporary setback and shares will soon resume their upward trajectory.
Of the 57 analysts who cover the stock on Wall Street, 48 still rate it a "buy" and just three as a "sell," according to Thomson Reuters.
This is usually an ominous sign in a stock. The best stocks are often the ones nobody wants.
The next piece of bad news is that despite the recent plunge in Apple's stock price, its market value is still enormous. The company has 945 million shares outstanding. At $522 a share, they value the entire company at $491 billion. That's more than Exxon, and twice the size of Procter & Gamble or Pfizer.
Elephants don't dance, the old saying goes. It's harder to make big returns from a big stock. For Apple to grow by just 10% a year for the next five years -- a very modest return for investors used to spectacular gains -- it would have to add another $300 billion in market value over that time. That is more than the entire value of Johnson & Johnson today.
The third piece of bad news is that, as some idiot predicted two years ago, tablets, like touchscreen phones, are rapidly becoming a commodity item. See Move Over, Apple! My Tablet Cost $200
The first iPads, like the first iPhones, were greeted like liberators when they arrived. People crowded around to see them. How long ago that seems now.
That was only a few years ago. But already these products, and their rivals, are everywhere.
You can get excellent tablets running on Google's Android and other systems. I have a very good one that runs Microsoft Windows 8. Naturally, when everyone is producing a tablet, prices will come under pressure. Apple may still charge more than many rivals, but customers do have other choices.
Furthermore, in an industry that has such rapid replacement cycles, any competitive advantage is always going to be fleeting.
But against all this gloomy stuff, there are some more-promising signs for investors as well.
The first is the valuation. The company's market value is gigantic, but so are the profits. The current stock price is still only about 10 times forecast earnings for the next twelve months -- a very low valuation for a quality company. The stock market average has historically been about 14 to 15 times forecast earnings.
And Apple's true valuation is really even lower than that, because the company is sitting on about $96 billion in effective net cash. Subtract that and you have an effective underlying stock price of about $430. That is less than nine times forecast earnings of $49.31 per share. (Most of the cash is offshore, and would be subject to hefty federal corporation tax if brought home. So it is still sitting offshore, depriving investors, and the U.S. economy, of its benefits. Yet even net of those taxes, Apple's cash is worth about $70 a share.)
Cashflow per share is forecast to rise from $57 in the fiscal year ending in September to $70 in the subsequent twelve months, and to $77 in the twelve months through September 2015. if Apple delivers on those forecasts, the stock is inexpensive.
Investors shouldn't worry too much about these lawsuits with rivals such as Samsung, either. They're a sideshow. They attract a lot of media attention, but they are not a reason to own, or not own, the stock. Apple was never going to be able to stop other companies from launching touchscreen phones and tablets with pinch-to-zoom capabilities and so on. They were always going to find a way to compete. Apple didn't invent the tablet -- I saw Bill Gates unveil the Windows Tablet in Las Vegas in 2000, 10 years before the first iPad. What Apple did was do it right.
Apple still has a reputation for design, excellence and ease of use that is well-founded and hard to dislodge. It can lose that reputation, and losing a reputation is easier than gaining one, but as long as it can hold on to that, it can continue to charge a premium for its products. This should be viewed as a luxury-goods company as much as a technology company. Millions of people choose to pay more to own an Apple.
My late friend Dan Bunting always said that one of the best routes to riches was to earn the trust of the consumer. I am frequently amazed at the power of brands. There isn't a stronger one on the planet than Apple (though, of course, in the fast-moving world of technology, a reputation can fade a lot faster than it can be earned).
The cost difference between a $500 iPad and a $350 rival may not work out as very much for those who use these devices a lot, either.
Apple also has a huge installed base of current users who like the company's products and just don't want to switch. And there is also the appeal of China and emerging markets. You could argue that everyone in America who wants an iPhone has one. In the rest of the world, that is far from the case. James Cordwell, analyst at Atlantic Securities, says initial sales of the new iPhone 5 in China are impressive and a positive sign for the company.
Finally, and oddly, I think there is huge potential for the Apple TV set-top box. I was an early adopter, and for a long time I felt like I was the only person who bought one of these things. But I dumped cable years ago for an Apple TV and for a rival, Roku, which gives me access to TV and movie services like Amazon, Netflix and Hulu Plus.
Such things, I strongly suspect, are the future of TV. This may be a huge opportunity for Apple.
Today, for all this, Apple is still a phone stock. The iPhone's profits account for about 60% of the stock price, according to analysts. The iPhone has faced competition from Android and others for years and still succeeds in each replacement cycle.
All this is good news. And before investors panic, they should understand why the stock has fallen. The introduction of the cheaper iPad Mini, and growing competition in the tablet business, has caused a flurry of uncertainty. Fund managers hate uncertainty. They run from it, irrationally.
Furthermore, the looming "fiscal cliff" has caused a number of people to rush to cash in some of their enormous capital gains on Apple stock before taxes rise. That rush caused the stock to fall. Others, seeing the stock falling, rushed to cash in their capital gains ... and so the cycle continued. It's a stampede.
I'm skeptical of any stock everyone loves, and I am not surprised at the recent reversal hitting Apple. I'm actually surprised it has taken so long. And it's needlessly risky to have more than about 10% of your portfolio in any one stock.
Is the current panic overdone? It wouldn't be the first time