Take out Apple and IT looks very expensive
The innovative company drove an entire sector but has lost its way without Steve Jobs.
I have been warning about a major shift in Apple (AAPL) for the past three quarters, and now this is happening in front of our eyes.
Apple is not the same company without Steve Jobs: It became greedy and did not treat suppliers well, and the competition has caught up and, in many ways, even surpassed it. Unless Apple can somehow regain its cutting-edge status, fickle consumers will look elsewhere.
Except for die-hard Apple fans -- the kind of people who will never look at a PC --consumers won't buy an iPhone, iPad, or even an Apple TV if it isn't better than the competition and competitively priced. Apple cannot grow without the masses.
I have another concern about the broader tech sector. It saw earnings per share grow 4.01% in Q3, while revenue grew 2.82%. This sounds like a decent number, but the price-to-earnings multiple for the sector is over 15, and that makes its price/growth rate very rich. Whether you look at the Vanguard IT ETF (VGT), the NASDAQ 1000 ETF (QQQ), or any other IT exchange-traded fund, you can see the multiples are at or above 15 times earnings, but the sector is only growing at 4.01%. That means the valuation is almost 4 times the growth rate, which is much higher than the normal valuation -- 2.5 times.
However, almost all of that growth came from AAPL. When we remove AAPL from the IT sector, the earnings-per-share growth rate changes to 1.39% and the revenue growth rate contracts to -0.46%. Without AAPL the IT sector looks very different, and an already rich multiple looks far richer than it did when AAPL had staggering growth.
If the reports are correct and Apple shipments are halved, the positive influence of the stock will be erased and valuation questions will come into play. Instead of almost 4 times growth, IT will be valued at over 11 times growth, and I don't know any prudent investors who are willing to pay that for anything unless there is some revolution that will cause growth rates to explode. There is nothing like that on the horizon and therefore IT is to be avoided.
In Q3, 2012 the strongest and weakest companies in the IT sector are listed below.
Strongest revenue growth:
Western Digital (WDC) Information Technology 49.8%
Salesforce.com (CRM) Information Technology 34.9%
Lam Research (LRCX) Information Technology 33.3%
Weakest revenue growth:
Applied Materials (AMAT)
Lexmark (LXK) Information Technology -11%
Dell (DELL) Information Technology -10.7%
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These hot movers could rise by double digits in coming months.
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