Why Apple's lofty valuation is scary

Investors shouldn't lose their skepticism about this stock. Any hint of trouble could send shares tumbling.

By Jonathan Berr Aug 17, 2012 3:24PM
Every time Apple (AAPL) hits a new milestone I can't help but think of another company that was also once a Wall Street darling, Enron, which collapsed under massive accounting fraud.

I'm no way suggesting that Apple is anything but a legitimate enterprise. But the true believers in Apple are eerily reminiscent of Enron's fans back in the good old days. I should know because I was one of them.

Post continues below.
When I was at Bloomberg News in the 1990s, I was happy to oblige my editors' insatiable demand for Enron stories because the company was exciting. It was an upstart, and there is a natural inclination among reporters and other observers to root for the underdog.

We were hardly alone. I visited Enron's headquarters; met fraud mastermind Jeff Skilling, who was fairly personable; and wrote a laudatory feature about Enron's online business, which I later regretted. I wasn't the only journalist who drank the Enron Kool-Aid.  Fortune Magazine dubbed Enron "America's most innovative company" for six years in a row.

Flash forward more than a decade, with investors showing the same zeal for Apple that they showed for Enron. Less than a month after the company issued "disappointing" quarterly results, the sock reached an all-time high, giving it an astounding valuation of more than $600 billion. 

Jefferies & Co. analyst Peter Misek on Friday raised his Apple price target and told clients that the much-anticipated iTV and iPad Mini are now in production. Another analyst, FBR Capital Market's Craig Berger, described how the upcoming launch of the iPhone could be one of the most important in the company's history and could generate profits of as much as $50 a share.

Misek, Berger, PiperJaffray's Gene Munster and all the other Apple bulls out there may be underestimating Apple's growth prospects. They seem to think the Apple of tomorrow will be even more awesome than today's. That's a dangerous assumption. One lesson investors can draw from Enron is that true believers in any company often are proved wrong. 

Apple, whose stock is up nearly 60% this year, is not on the verge of collapse. But even the slightest hint of trouble could send its shares tumbling. 

Jonathan Berr does not own shares of any of the listed companies.  Follow him on Twitter@jdberr.

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Tags: AAPL
19Comments
Aug 18, 2012 3:39PM
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If Apple was selling at a ridiculous valuation, I would be scared, but by almost any valuation method, Apple is still cheap with a P/E of around 15 and a PEG ratio of .72.  Apple also has a sqeaky clean balance sheet and is sitting on more cash than most countries.

 

All of this doesn't mean they are immune from making big mistakes in the future.  It's almost inevitable that they will.  And there are always upstart companies and technologies attempting to build a better mousetrap.  Just look what happened to once dominant Kodak when digital photography replaced film.  But for now, I'm sticking with Apple as my number one investment.

 

 

Aug 18, 2012 9:35AM
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No one lives forever.  Neither people or companies.
Aug 18, 2012 12:25AM
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Didn't isaac newton use an Apple to demonstrate the Laws of Gravity???

 

or is this different ... i-gravity?

Aug 17, 2012 11:48PM
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However you still need to consider the environment we are in... Europe, etc. Anytime a stock is at a high it is suspect. Add in all the other factors and any bad news can/will be exaggerated. The point of the article really is...when the day comes... and it will come. BOO! 
Aug 17, 2012 8:17PM
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Any way you look at it, Apple's cheap based upon fundamentals.
Aug 17, 2012 8:06PM
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While the author of this article has complained year after year about AAPL. Most of us just got on the train and have rode the best stock out there. Sour grapes for him, HUGE $$$ for us.

 

 

Aug 17, 2012 8:00PM
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The author does not know the definition of lofty valuation and he also is not very good at making comparisons.

 

Enron had an stupid high metrics, PE and PEG never once even had low values.

 

Apple has a stupid low PEG and a PE below 10 (ex-cash). All the other comments seem to forget that PE should be really ex-cash and AAPL has a mountain of it.

 

Apple will grow PROFITS an average of 15% the next 5 years...totalling $300Billion. Yes, that is with Apple not selling the most smartphones...they never wanted to be #1 in sales. They simply want to make the most profits and sell to those with money!!! Apple never cared about the uneducated or those who can not make enough to buy the top products. Those individuals can go and buy a low cost POS andriod product.

 

 

What do you want the PE to be of a company that makes those kind of profits??

 

 

Aug 17, 2012 7:49PM
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This is not a foolish article. Apple's PE is 15 and it's forward PE is 12 but what if it's forward performance is challenged by Gogle's Android and Microsoft's Windows at the same time. After all, Apple's not leading in smartphone's, Samsung is with Android and will be using that same hardware to host Windows Phone 8 in 2-3 months.  Same goes for tablets and Apple can't attack Windows 8 like they are attacking Android.
Aug 17, 2012 7:43PM
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This is a foolish article.    aapl's pe is 15.  It's forward pe is 12.  It's peg is .65.  JUST WHAT ABOUT ALL THAT IS A "LOFTY VALUATION"?  Are you confusing a stock's "price" with it's valuation?  Man, that's a 2nd grader's thinking.   And even worse you mention Enron in comparison?   You sound like you don't even have a clue.
Aug 17, 2012 7:19PM
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LOL.  Worst article ever written on msn.com HANDS DOWN

 

Any bit of bad news could send the shares tumbling?  Really Jonathan???  What do you think the last earnings miss was you moron?!  AAPL missed every earnings estimate out there..  not a SINGLE analyst's estimate was reached, yet the stock only tumbled 5% on this news, and trades at an all-time high just weeks later.  And it STILL trades at a P/E ratio lower than half of the S&P 500. 

 

I seriously cannot stand the garbage that this site puts out.  Seriously, Jonathan, you need a new ****ing career you tool-bag loser. 

 

MSFT must HATE the fact that AAPL has OWNED THEIR SOULS for the last decade and will continue to do so for decades to come through better innovation, better marketing and a MUCH, MUCH more creative tactical engineering team. 

 

Disclaimer:  I am LONG AAPL for life

Aug 17, 2012 6:42PM
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Just sour grapes.  I mean, how often are these so-called investments writers and gurus are proven wrong?  Much moe than the regular Joe is proven wrong.

This guy just needed to write something negative to be a contrarian.  I would like to see what has he recommended this year.  I like to compare to my own buys and sells.

 

Like someone else said, how can we get a job writing for MSN?  Because it does not take any common sense.  There is nothing in common between Apple and Enron, except that they have gone up.  You can make the same assumption withing those terms with hundreds, maybe thousands of companies.

 

Don't you guys love this jab he throws at Apple disguised as a compliment: 

      "and I am no way suggesting that Apple is anything but a legitimate enterprise."

Aug 17, 2012 4:35PM
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You have got to be kidding me!  You are actually comparing Apple, a company that builds things and sells the product to consumers, to a fraudulent energy company that was simply trading the spread between supply and demand for energy?  Even back then, many people thought Enron wasn't real, any more than the dot-com bubble wasn't real.

Apple BUILDS things (ok, Apple's contract manufacturers do the actual construction) and sells them for a profit.  How anyone can compare Apple's so-called "lofty valuation" (at a below market PE, no less), to Enron and the height of their fraud, is beyond me!
Aug 17, 2012 4:30PM
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Obviously someone didn't listen to Jubak or Cramer and missed the boat.  That's OK because there are plenty of other investments.  I don't see any falsification of income statements or undocumented items on Apples balance sheet which would justify a comparison to Enron.  Their biggest problem is millions of expatriated dollars which could cause a future tax liability when/if they bring them back into the country.  The same problem faced by Microsoft, GE, Exxon ... oh heck there are a hundred companies with offshore funds and not a single one of them lying about it.  So don't go calling people thieves and lyres just because you didn't do your homework.
Aug 17, 2012 4:07PM
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Comparing APPLE to Enron is an insult to the worlds greatest Company.  The DNA of these two firms could not be more different. AAPL isn't perfect and it's one of the toughest places to work- still, Tim Cook & Co. continue to deliver excellence for investors, consumers and the Enterprise. The inability to list the correct ticker symbol reveals this author isn't qualified to write classifieds- much less advise investors.
Aug 17, 2012 4:06PM
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The problem with Enron was twofold: 1) massive off-balance sheet liabilities that investors could not see and 2) a fraudulent product (bandwidth).  Say what you want about Apple (I don't buy any of their products) but they do sell a lot of merchandise at a premium price.  I think there's a big differnece between the two companies.
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