Some Apple Bears Can't Do Math


Part of being a Fool is considering a wide range of opinions with the hope that doing so will make us better investors. That's why we Fools will sometimes have respectful duels and take opposing sides. However, there are times when "pundits" just need to be called out.

Even though I'm a big Apple bull, I'll acknowledge the bearish cases if there's a solid thesis underlying the pessimism. There aren't a whole lot of Apple bears out there, but they do exist. Two in particular, though, make claims that just don't add up.

Bear No. 1
Heritage Capital's Paul Schatz was on Yahoo! Finance's Breakout blog this morning arguing that the recent Apple selloff was just a preview of more downside in store for investors.

Shares have seemingly bottomed and bounced off lows near $506 in November, and Apple has recovered about 14% from those prices. That relative low represented an incredible pullback of $200 per share, or nearly 30%, from the all-time highs set in September.

Schatz believes the drop is "the first leg down of a multiyear decline, which I think ends up knocking 50% to 70% off the stock." Eventually, he thinks Apple will fall below $400, in which case investors should consider any pop a selling opportunity to get out before the iEmpire crumbles. Apple's meteoric rise of more than 200% in the past five years is "irrational exuberance," he figures.

Part of his bearishness is that the macro picture is going to be problematic, regardless of how the fiscal cliff scenario plays out, and "Apple's gonna take it on the chin."

There's not much else underlying that call. A 70% loss from the high would put Apple's share price around $210, which would put Apple's valuation under $200 billion. That's less than longtime rival Microsoft is currently worth at $222 billion, and it's in the midst of a major transformation to be like Apple anyway, since its core Windows business is in a precarious position along with the PC market. It's been two years since Microsoft was worth more than Apple, and I find that unlikely to change anytime soon.

Bear No. 2
It's time to check in again with Ed Zabitsky of ACI Research, a two-person shop based out of Toronto. Zabitsky has maintained a $270 price target on Apple for the past two years. He recently reiterated his stance to The Telegraph, saying the recent pullback makes him "less of an outlier." He went on to say: "Change is de rigeur in technology. The amazing thing is that things did not change for so long. Apple was able to remain dominant, not by luck but by skill."

I'll give Zabitsky a little bit of credit, though: He's made some conceptually sound cases on why Apple is doomed, such as the threat that carriers will cut iPhone subsidies. He just turned out to be dead wrong. In his desperation, he then somehow reasoned that HTML5, a technology that Apple supports, would herald in a new era of open apps and iDevice sales would plummet. Still wrong.

Native apps have far better performance than HTML5 Web apps. Just ask Facebook's Mark Zuckerberg, who said, "The biggest mistake we made as a company was betting too much on HTML5, because it's just not there yet." When Facebook went native with its iOS app, it saw massive improvements in performance.

Math, schmath
At $270, Apple would be trading at 6 times trailing earnings and 4.6 times forward earnings. At $210, it would be trading at 4.7 times trailing earnings and 3.6 times forward earnings. That's cheaper than Dell , a company still trying to find itself in the new era of mobile computing, which trades at 6.8 times earnings.

That's saying something that a monstrously profitable company at the forefront of the biggest paradigm shift in consumer computing in generations should trade at a lower earnings multiple than a commoditized PC maker with razor-thin margins currently embarking upon an uncertain transition into becoming an enterprise IT player.

And it sounds rather unreasonable for a company that just grew net income by 61% and booked a profit of $41.7 billion in the past 12 months alone. Looking at cash generation, operating cash flow last year was $50.9 billion (up from $37.5 billion in fiscal 2011), and total cash has more than doubled over the past two years.

Even if we were to assume Apple puts up zero earnings growth next year, that would be more than $80 billion in profits in two years. Its total cash in the bank at that point would probably total no less than $150 billion by itself. This is a company that Schatz thinks is worth only $200 billion and Zabitsky values at $250 billion? These figures don't add up.

There is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and, more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of Apple, Facebook, and Microsoft and has long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Dell, Facebook, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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