Has the law of large numbers finally caught up with Apple? That’s one explanation for why the stock (AAPL) dropped more than $200 a share from the top in September, representing a decline in the company’s market cap of more than $190 billion (speaking of large numbers). According to this theory, it has dawned on investors that Apple’s key product, the iPhone, has become so popular and taken such a significant share of the smartphone market that sales growth can only disappoint from here.
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The problem with that argument, as Kevin Landis, manager of the Firsthand Technology Opportunities Fund (TEFQX), sees it, is that it fails to consider that the biggest source of growth for the iPhone will not be defectors from Android or other smartphones. Instead, he contends, it will be the multitude of late adopters who decide to trade up from the more primitive models that they have been getting by with. Such old-school hardware still vastly outnumbers newer devices, Landis said, especially in foreign markets. He added that the growth outlook becomes even more compelling when other types of gadgetry, such as iPad tablets, are thrown in.
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The combination of the share price decline with the strong prospects for earnings growth, as Wall Street analysts judge them, has left Apple with a very low PEG ratio, a valuation measure that divides a company’s PE ratio by its annual earnings growth rate.
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A low number means better value, and as the chart below shows, Apple’s PEG ratio is very low, having fallen steadily for several years.
Landis pointed to another reason for the stock’s decline: anticipation of an increase in the tax rate on long-term capital gains, something that many Apple shareholders have accumulated. “It’s outstanding how many people decided late in the year that they wanted to pay capital-gains tax,” he remarked. “If you were going to sell Apple, you just sold it. People are not dying to sell a stock and a company that keeps giving them a reason to own it. They sell great products, with lots and lots of market share to be gained.”
Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at firstname.lastname@example.org.
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