If you’re looking for signs of a tech bubble, Apple’s (AAPL) latest moves won’t help your case. The tech giant announced on Wednesday that it would split its stock 7 for 1 and increase its already massive stock buyback and dividend plans. There were a lot of splits by big companies during the Internet bubble. Cisco Systems famously split its stock every year from 1996 through February 2000 – just before the bubble popped.
But Apple is hardly making the move due to a rocketing stock price. The shares are down 6% so far this year, though it looks like they will erase the loss and get back to even when trading starts today. Apple remains 26% below its all-time high of $705.07 hit in September 2012. And the shares trade at a price-to-earnings ratio of about 13, below the market average and nowhere near the crazy levels seen in the Internet bubble.
In fact, almost all major tech companies – the ones worth at least $100 billion – are trading with modest P/E valuations. Microsoft is at 15, IBM 13, Oracle 17, Intel 14, Cisco 15. Only Google, at 30, and Facebook, at 81, could be considered richly priced. That wasn’t the case during the Internet bubble, when almost all of the major companies carried absurd P/Es.
Does hedge fund manager David Einhorn, who was complaining that we’re in a “second tech bubble” this week, remember the first one? The average P/E on the Nasdaq was over 100 – the average! Technology stocks represented 35% of the value of the S&P 500 Index versus a little over 18% today.
To be sure, some tech stocks may be overvalued. Facebook trades at 80 times its profits, but the company is also insanely profitable, growing fast and raising prices. And there may be some mini bubbles in a few areas, such as cloud services. Castlight Health, anyone?
But such minor bubbles come and go all the time without damaging the overall market. Take Castlight (CSLT), which went public last month and offers companies a way to track employee healthcare spending. It rocketed to $42 a share its first day, valuing a company with $13 million of sales last year at about $3 billion. But almost immediately, the stock fell to earth. It closed at $15.70 yesterday.
And the entire tech IPO market has fallen. Back in the Internet bubble, more than 300 tech companies went public a year and popped on average 50% to 70% on day one. So far this year, there have been two dozen tech IPOs and the average one-day gain was 30%.
Okay, so no bubble. But how is Apple doing? Just fine, despite what you may have read. The company surprised analysts by selling 44 million iPhones in the first quarter, about 6 million more than expected, leading to huge beats on revenue and profits too. That’s why the shares are up about 9% in pre-market trading.
While some pundits say Apple needs to do a huge acquisition or announce some revolutionary product in a whole new area, the company can do just fine by improving its current line up. Apple is widely expected to offer new iPhones with bigger screens this fall – a gaping hole in its current product line. The global smartphone market just reached one billion units sold last year, there’s plenty more growth there. iPhone sales only grew 13% last year – Apple can do much better with new models and perhaps more competitive pricing at the low end.
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