Is Apple Overvalued?

Shares of Apple Inc. declined this week to their lowest level since January on investor worries about the company's ability to keep outperforming as it has in the past.
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

Shares of Apple Inc. declined this week to their lowest level since January on investor worries about the company's ability to keep outperforming as it has in the past. It's not really the company's fault since it could be argued that it's the over-exuberance of investors that has inflated the stock price in the first place.

With an almost cult-like following, including sometimes in the press, Apple's true value is hard to gauge accurately since it's also colored by hype. Market analysts routinely fawn over the company with rosy projections of future performance. That may boost the stock price in the short term but can be deadly when those projections outpace reality.

The latest market correction is a good example. Even though iPhone sales soared 59% by revenue (and 35% by units) in the latest quarter compared to the same period last year, Wall Street analysts were disappointed and investors seem to be worried that sales could eventually slow down as tweaks to future models are more evolutionary than revolutionary. In addition, Apple is facing serious competition in China from Xiaomi and Huawei, where the company has fallen from the Number 1 spot to 3 after first rising to the top following the release of iPhone 6. The company sees the Chinese market as key to its future growth.

This points clearly to the crux of the issue, which is the high dependency of Apple's performance on its iPhones, from which it derived 63% of sales in the latest quarter, according to the company. Such concentration presents risks.

The cycle is familiar to everyone: Apple introduces a new iPhone, sales and market share go through the roof, then settle down as the year progresses. Rinse and repeat. By itself, that's not a bad business model and theoretically could go on indefinitely.

But like any other product, there is the risk of consumer fatigue and obsolescence. Apple's market share during the second quarter of 2015 (fiscal Q3 for Apple) was 14.1%, down from 18.3% during the first quarter, according to market research firm IDC. And a forecast cited by Forbes projects Apple's share remaining mostly flat at 14.2% by 2019 (albeit, with higher volume).

None of this means that Apple won't continue to do well but it does suggest that the company's dominance in this key segment could gradually be plateauing.

There is also the problem of Apple becoming a victim of its own success. With nearly every quarter breaking previous records in terms of sales, it could become difficult for the company to keep outdoing that year after year, according to analyst Mike Walkley of Canaccord Genuity, quoted in Bloomberg. At the same time, the expectation of outsized growth, bolstered by hype, can push Apple's value higher than it necessarily deserves to be.

That disconnect is what can cause the stock to plummet and punish those investors who are entering the market on unrealistic projections. To be fair, Apple currently trades at around 12 times- price-to-2015-earnings whereas Facebook trades at 67 times and Microsoft at 18 times so the tech giant is not in bad company; but then again, that could just mean that other players in the tech space are overvalued as well.

S. Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. This article also appeared in FORTUNE.com

Popular in the Community

Close

What's Hot