IT: Overvalued without Apple
If you take out the tech giant, the sector looks like a laggard -- and vulnerable.
The rationale for the recent decline of Apple (AAPL) has been debated, but something that cannot be debated is the stock's influence over the technology sector (XLK). Quantifying that relationship is important when assessing future earnings and revenue growth for the sector.
To understand exactly how influential Apple has been during the second and third quarters of 2012, I have used the earnings and revenue tool from Stock Traders Daily.
First, Apple is flirting with clear support near $520, but if this level breaks, the stock could fall by another hundred points quickly. The technicals show a broken pattern, the up channels no longer exist, and the risk of material decline is high.
This technical approach is often criticized, even though the decisions of smart money can be identified by price movements. By observing what the smart money is doing we can get an understanding of what it might know about the future. In the case of Apple there are still many emotional investors who refuse to believe that it may have become a completely different company this year.
I have said before that I expect a material shift in growth in 2012. This has yet to show up in Apple's earnings or revenue, but if it does, the valuation of the IT sector will be impacted.
Starting with the second quarter of 2012 the earnings per share (EPS) growth rate for the information technology sector was 6.89%, compared to a growth rate for all stocks of 4.13%. Revenue growth for the IT sector was 4.69% and that too looked good against all companies, whose revenue growth was 2.39%. However, when we remove Apple's influence from the IT sector the EPS growth rate for the second quarter drops to 0.53% and the revenue growth rate drops to 1.55%. Without Apple, the growth rate of the IT sector would have been much lower than the growth rate of the market itself.
In the third quarter the IT sector grew EPS at about the same pace as the market -- 4.09%. Revenue growth outpaced the market, at 2.82% versus 1.94%. Again, however, when we remove Apple, the growth rate for the IT sector looks considerably different. The EPS growth rate is reduced to 1.39% -- considerably below the market average -- and revenue actually contracts by 0.46%.
I do not know where Apple's earnings and revenue growth will go from here, but I do know that the IT sector would be lagging the market considerably without Apple, and that smart money has already begun to act. The question is, if Apple's growth rate slows significantly, will the entire IT sector fall out of favor?
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The push is on for undervalued, cash-rich technology companies to return more money to investors. And there's still room for dividend growth.
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