In April 2013, stock prices for Apple (NASDAQ: AAPL) fell below $400 a share, the lowest since 2011. Once predicted to reach over $1000, the numbers peaked for Apple in September, 2012, when it was valued at $706 a share. Since then, the numbers have been in free fall, leading many economists to say “I told you so.” A number of business magazines and analysts have been saying since 2011 that AAPL is a bubble. There are many factors that might be contributing to Apple’s steep rise and fall, including competition from brands like Samsung, the death of Steve Jobs, and a nearly 9-month wait between product launches in 2013. But the thing that really makes it a bubble is the fact that everyone knows Apple stock is the most successful. Forbes calls it the cab driver syndrome, the modern version of listening to the shoe shine boy’s tips a hundred years ago. Does that mean it’s time to sell?
1. The Valuation Argument
Economists who argue that Apple is not necessarily a bubble claim that while prices are falling, valuation remains high. Some say that fears about Apple’s stagnation when it comes to designing innovative products are unfounded. According to the Wall Street Journal, from a valuation standpoint, Apple stock is trading at its cheapest level in 10 years. Their balance sheet also contains zero debt and close to $140 million in assets, plus a 2.7 dividend yield. If you have faith that Apple can utilize this room to grow in the next three years, it could be argued that just as bigger investors start bailing out, it might be a great time for smaller investors to buy into the company. Apple’s sinking prices can be blamed on the transition from being a growth stock to a value stock, with none of the fundamental qualities in the company really justifying the fall. Keep in mind that around 91 percent of current iPhone users plan to buy the next-generation upgrade. With the 5S model released later in 2013 and the iPhone 6 coming in 2014, can Apple rise again?
2. The Loss of Steve Jobs
Of course, most economists no longer put a lot of faith in the idea that Apple will come back bigger and better than before. The common perception is that the AAPL bubble is quickly deflating. One major reason is the death of Steve Jobs in October 2011. Jobs was a unique visionary whose ideas placed him at the center of the biggest technological revolution in history, and it’s not surprising that his death would cause a short-term hit in the stock market. But analysts claim that short-term hits caused by the death of a CEO can easily turn into long-term damage with any company, much less the most profitable company in the United States. A study by Stanford University shows that even medical leaves by CEOs result in 2 to 5 percent losses and the death of founders, which happens to about 7 companies every year, causes a more permanent decline. With Jobs especially, it’s unlikely an innovator of that strength will come along again. Apple then begins to lose its differentiation – it becomes just another stock.
3. Apple’s Competition
For a while, it seemed like other companies were a distant second to Jobs’ empire, but as Apple becomes less special, other companies are increasing innovation. Most economists say that competition is now a bigger factor in Apple’s sales than ever before. The most impressive may be Samsung, whose Galaxy S4 model is proving a viable alternative to the iPhone. While Android and iPhone make up 9 out of 10 mobile device purchases in the country, the smartphone industry is constantly reinventing itself. And while iPads still make up over 80 percent of tablets, that’s still an emerging market. All evidence points to the fact that Apple has a disadvantage when it comes to competing because for so long, it just didn’t have to. It’s the classic problem with being a pioneer.
Is Apple going to follow in the footsteps of Microsoft? The bursting of the AAPL bubble is potentially bad for everyone – employees, traders, and every modern-day shoe shiner who owns a piece of it. Analysts say that bubbles are a natural part of capitalism, but the trick is knowing exactly the right time to sell. For AAPL stockholders, that time may have come and gone. No matter whether you believe in a resurgence or not, all empires do inevitably fall, and sometimes they hurt your wallet in the process.
Writer Stacy Hilliard is a guest blogger for mba sites. Interested in business and developing your own? You might want to learn more about the mba program offered at Northeastern University.