Spare Some Sympathy for Apple

02/29/2012 11:15 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The world’s most valuable company has challenges aplenty, but making money for investors isn’t one, writes senior editor Igor Greenwald.

You’ve undoubtedly heard that Apple (AAPL) is a company beset by problems. A partial list:

  • It’s gotten too big.
  • The founder who personified the company is gone, and it’s far from clear that his disciples will be as successful over the long haul
  • The workers who assemble its products in China labor in Chinese working conditions that, while apparently preferable to subsistence farming, offend a fair share of Apple’s customers
  • The stock is up 32% in two months and clearly can’t sustain that pace
  • Apple is likely to unveil the iPad 3 on March 7, and the pattern of past product launches has been an anticipatory rally followed by a sell-off on the news
  • Its chief executive admitted this month that the company’s $98 billion in cash is more than it needs to run its business, stoking speculation about a dividend. Apple is sitting on so much scratch that when the payout is finally announced, it could easily prove disappointing
  • Its expensive phones depend on heavy carrier subsidies, and lag in the crucial emerging markets where these are not available
  • Its continued success depends on a not-so-small army of patent lawyers needed to harass rivals like Samsung (SSNLF) and deflect harassment from same, as well as dealing with nuisance suits like that from a Chinese firm claiming the rights to the iPad trademark

Clearly, Apple is lucky to be in business at all with so many negatives weighing it down. And yet here we are, and there it is.

Tuesday’s record-high closing share price pushed the valuation to $499 billion, or $88 billion more than former top dog Exxon Mobil (XOM), unceremoniously deposed by Apple just in the last month.

Apple’s revenue rose by $44 billion, or 67%, last year; it’s expected to grow by $48 billion (44%) in fiscal 2012. Keeping that pace going in 2013 would require an additional $69 billion in sales, followed by an increase of $99 billion in 2014, and so on.

Nature abhors compounded growth in the long run, and likes nothing better than to cut its vectors down a peg or five. Sometimes it’s a clever predator or competitor, other times just the inevitable failure to adapt. The more Apple wins, the less room and time it has left and the more urgent the imperative to win every time at everything before entropy triumphs, as it must.

Of course, that was just as true in June with Apple trading in the low $300s, and in October when the stock was trying to hang on to $400.

The trouble with waiting for a champion’s inevitable downfall is that you end up missing all the glory. Apple’s market cap may be large, but its global market share is tiny: some 5% for both the iPhone and the Mac.

So there’s lots of time for the increasingly wealthy emerging-markets consumers to trade up to Apple. (Of course, the iPad already dominates the booming tablet market.)

At 12 times the current year’s estimated earnings, the valuation already discounts the assumption that Apple’s growth is likely to slow in the years ahead. The multiple could contract further, even as the share price increases.

Yes, Apple faces challenges ahead. We should all have such problems.

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