Apple Maps was a glitch.
Now Apple fans hate iTunes 11.
Is this the same company who could do no wrong? Everyone seems to have an opinion on Apple. The crossfire or cross talk is deafening. People pointing out simplistic fundamentals like P/E ratios and the hoards of cash on the balance sheet. Others are banging the drum with technical analysis, using moving averages, MACD, and relative strength. But the market itself has a voice. Do you hear what the market is saying? How is this possible you say?
The market, the collective wisdom of millions of people coming together to transact at a single price, has an opinion – a voice. How do we get to hear this voice? We can hear this voice by looking at the interplay of price and our calculated EBV (Economic Book Value) lines on our model price charts. These parallel lines are a constant multiple of our EBV or green line on our charts. As I have said many times in blogs elsewhere some EBV lines are more significant then others. We highlight these lines in colors for easy differentiation. Our yellow or gold line is EBV+5, five lines up from our EBV or green line.
What so special about EBV+5?
EBV+5 marks an important dividing line in what the market is saying about the company in question. Companies above EBV+5 have the wind at their backs if you will. The market is giving management an asset – money – through the share price of the company to further growth prospects of the entity. If management wanted to sell shares or purchase additional companies with stock the market would be happily writing the checks at a large multiple to accounting book value. Companies under EBV+5 are companies not given this valuation premium, are not sanctioned by the market for this special status. Sure companies under EBV+5 can issue equity and do M&A activity however the cost to the company is high due to the lower valuation of the company. This is why we call companies above EBV+5 as having “Economic Velocity”.
Apple transited above EBV+5 back in late 2004, and except for a brief period in late 2008 and early 2009 during the financial crisis, which makes this negative transit – some 8 years later – noteworthy.
What am I saying?
Apple is still Apple. This blog is about valuation and “the market” just made a valuation call reducing the zone where Apple’s stock price gets to hangout. Also, “the market” has taken away the wind on Apple’s back or “Economic Velocity” which I refer to above. With less valuation management will have to work harder, produce more with less of a result on its stock price. Yes, book value will grow over time meaning higher stock prices with far less help from the market in terms of valuation.
Just to put this in context all major technology companies in the S&P 500 now trade under EBV+5. Microsoft transited through EBV+5 back on October 28 and you can read my blog here. Apple was the only shinning star in the group until yesterday.
Economists from all strips are fond at pointing to innovation and technology companies as the future by which America and the world can pull off higher growth rates then we are currently getting. This maybe be true longer term however the market just made a call on one of America’s shining stars of innovation – Apple Inc. – that it will have to work harder, or produce more with less capital, for higher share values down the road.
Is anybody listening?
Model Price chart on Apple Inc.
Apple Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of AAPL subsequent to this post will be maintained on Facebook, here.