The sentiment towards Apple is generally very bullish. Here are two covers suggesting that:
- Time Magazine:
- Le Monde Magazine: Jobs - The new Gutenberg?
I believe that sentiment at an extreme coupled with fundamental problems represents a dangerous mix. So I did a more detailed analysis of Apple.
The company looks great at the first glance. Its sales are growing healthy and profitability is high but I have stumbled upon a few signs of fatigue:
1. The year-over-year quarterly sales growth for the next two quarters is slowing (green; Yahoo Finance estimates used):
If the 3rd quarter in FY11 grows at about a 30% rate, it represents a slowdown of 50% from a year ago, which signals big problems with meeting earnings expectations by the end of FY11.
2. The latest quarterly operating margin is dropping significantly compared to the year ago figure:
> latest Q OM: 26.77%
> year-ago Q OM: 30.18%
This means the company is slashing prices to increase sales, a behavior that cannot last forever without bringing down earnings growth expectations.
3. The latest tax rate is dropping suddenly compared to previous numbers, suggesting the company might be struggling to meet the earnings forecast:
So an explosive mix might be starting to brew. The company is not overvalued yet with a P/E of about 20 so it may continue to go up along with the markets but I think that at the next intermediate-term correction in 2011 AAPL is going to be a great short.
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