Apple
$95.31 -$4.67
Questor says SELL
Questor is concerned that the world’s most profitable company is becoming a value trap.
Value trap
The shares look like a fantastic bargain, trading on about 10 times the $9.50 (£6.70) in earnings per share the technology giant earned in the past 12 months.
When you add in Apple’s $216bn cash pile, a plan to repurchase a further $47bn in stock by March 2017 and an annual dividend that is set to rise by 10pc to $2.22 in the year ahead, it looks like a dead cert. However, there are a number of important reasons why we wouldn’t bet the farm on this one.
The biggest threat to Apple is the shortening of technology life cycles. Tomorrow’s best-selling product is yesterday’s paperweight in next to no time. The most worrying sign of things to come is the fate of the iPod. The portable music device was launched in 2001 and sales peaked at 54m eight years later before slumping 81pc to less than 10m in the next six years.
Apple, the world’s largest company, expects revenue for the three months to the end of March of between $50bn and $53bn, which will mark a decline on the $58bn during the same period last year.
Growth in iPhone sales, which was 46pc a year ago, was just 0.4pc in the three months to the end of December.
Total revenue was $75.9bn, a marginal increase on last year. If sales of the iPhone have peaked already, then the downturn in trading will be painful.
Apple generates almost 70pc of its sales from the iPhone, 10pc from Mac computers, 8pc from the iPad, and 12pc from services such as iTunes, Beats headphones and iPods.
The technology giant has made efforts to retain customers by storing their photos, music and data in cloud-based services. But unless the iPhone is truly unique, it will experience the same sales decline as other technology products; in which case, the best guide for investors is to use a cyclically adjusted price to earnings ratio.
Apple’s 10-year average earnings per share is 340 cents, leaving the shares trading on a not-so-cheap 30 times earnings.
Currency risks
A large portion of Apple’s iPhone sales is dependent on consumer demand in China, where the company has admitted it is seeing “economic softness”.
Tim Cook, chief executive, said the firm was facing “extreme conditions, unlike anything we’ve seen before, just about everywhere we look”.
The impact of foreign currency fluctuations is hurting Apple’s sales when they are translated into dollars.
The lack of any detailed update on the Apple Watch is a further worry, given the company relies on successful new products. It reported falling sales of iPads and Macs in its first quarter.
Apple has not yet revealed sales figures on the Apple Watch
Shares in Apple are looking extremely expensive given the slowing sales and falling profit margin. The cash pile doesn’t provide much comfort as the majority is held overseas and Apple has to issue bonds in the US to repatriate cash to pay dividends.
• Apple Watch: in pictures
We most recently recommended selling Apple shares in May last year at $126, and they have fallen 25pc since then. In order to get an indicative share price, investors can apply a rating of sector peers such as Intel or Cisco, which trade on around 13 times earnings, or $44.
Mind the gap and sell.
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