17 January 2006

Is the Apple too shiny?

One of the stock values that I understand the least is Apple. While I would have loved to have owned a stock that has tripled in each of the last two years, the valuation now simply does not make sense to me.

I'm guessing that the P/E of 54 is due to the growth of the iPod. It's true that sales of the little music player have been growing exponentially, but a P/E of 54 seems to say that will keep happening. The truth is that the growth has to stop slowing because of two reasons. One, there are only so many people willing to pay the current prices for a music player. Two, the "upgrade factor" will slow as features are as less cool.

Of the people I know with iPods, many are on their second or third, upgrading when the screen went color and/or when video was added. The next generation of iPod may only contain an FM tuner as a serious upgrade. While that will likely get me off the bench, I doubt many people will upgrade from earlier iPods just for FM tuning (see the sales of most other music players that already have FM tuning, for instance).

An analyst for the Motley Fool seems to agree with me and he has numbers to prove it! He estimates that Apple is about 30% overvalued unless they can continue to grow at 20% for the next decade. Hard for any company, much less a 30 year old one.

Another possible explanation is the hope that the iPod will spur sales of the Macs to users that would not have considered one previously. The truth is that sales were below Apple's expectations, despite what the financial press may say. The Intel-based Macs may expand the market slightly, but by introducing the replacement for the Powerbook (starting at $2,000) rather than the iBook (starting at $1,000) I think Apple missed an opportunity to make a splash in the sweet spot for laptop sales.

Apple currently has a market cap that exceeds Dell. That's insane, iPod or not.

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