On March 21st, Apple stocks closed at the price of $609.58, raising its capitalization to $568 billion. Although Apple has been the most expensive company in the world for more than a year now, the new heights being reached by the price of stocks are just astonishing. People started to ask if Apple should cost so much when it first outperformed Exxon, the world's most expensive company at the time. Now these questions begin to sound more and more loud.
Let's take a look at two charts: the first demostrates price of Apple stocks during the last five years, and the second shows the entire history of Apple stocks trading.
The company that was almost dead in 1997, have risen from nearly $13 per stock to more than $600. Moreover, in 2003 stock price was $20 on average, and in 2007 it was still about $80. Then Apple created iPhone and AppStore and the story began. In January 2009, stock price dropped back to $85 from nearly $200 in January 2008, but taking into account the whole market's conditions at that time, it's not very surprising.
Financial crysis of 2008 was severe, but rather short, Paulson, Bernanke and others did quite a good job, and markets began to recover. But now Apple wasn't just another company in a row. From the beginning of 2009, its stock prices climbed up without any significant pullbacks. In January 2010, it was traded at $200 per stock, at January 2011 the price was $325, and at the beginning of this year it reached $400 per share. Three months later, it is $600, and rising.
Five year change of its stocks price is more than 500%. Is it an enormous number? Of course, and any investor will sell his soul to devil to predict such rise. However, some other companies made their investors even more wealthy during the same period of time, for example, Alexion Pharmaceuticals (+1600% for five years) or Green Mountain Coffee Roasters (+1050%). The problem is that the other companies which value increased greatly, are much smaller. Alexion Pharmaceuticals and Green Mountain Coffee Roasters both have less than $20 billion capitalization, and most successful companies are valued at the similar point. Apple costs more than $500 billion.
Can Apple's value increase even more greatly and reach $600 or $700 billion, or even fantastic 1 trillion dollars? Maybe. I don't know exact answer, and nobody does. But there are some very disturbing aspects about future growth that would stop me from investing into this company, even though I like its reputation and its products.
Apple Inc. - the center of the world?
Apple is the most expensive company in the world. This is not just a simple fact to interpret. On the one hand, it means that everybody knows it, everybody sees its success, and of course, anyone would like to invest in it - mutual funds, individuals, hedge funds. People want to get their slice of the pie, and it only natural. It is also important to remember, that with such enormous capitalization, Apple's stock price affects almost all indexes, and many funds either invest in companies included into indexes, or they are being judged in connection with indexes' performance. So, virtually everyone is interested in the continuing growth of Apple's stock price.
But on the other hand, it means that people investing into Apple, will expect such enormous and even abnormal changes in its price in the future. What would you say, if the company which price doubled in two years will give you just 10% or even 20% profit in a year? It seems that you will be dissapointed. So the most successful company is not protected from failure in any way - actually, it is being put under great pressure of expectations.
Now let's look on it from the other side. When people buy stocks, they have different goals, of course, but any good investor must define strategy referring to the particular stocks or to the whole portfolio. What are the expectations connected with Apple stocks? Do people believe that it'll manage to reach $700 price? Or $1000 price? It is very hard to predict, but if you will look closely into stock charts, you'll see there were pullbacks after the first and the second reaches of $600 price, and the second pullback was quite significant. Of course, for almost any stock trading near $100-fold prices (or $10-fold, or $1000-fold) the picture will look pretty much the same, especially when the price reaches historic maximums. But massive sales near $700, for example, can make pullbacks more significant than those we see today, and this tendency may continue, making any new level more difficult to approach just because investors will not believe in the prospects of future growth - the company will be already too expensive. And such events may be viewed badly by the market which'll scrutinize the company's performance.
Of course, that is just one aspect of the problem. To be able to make conclusion on Apple prospects, one must also try to compare it to the other companies in the field, review its financial statements and look at the prospects of growth. I'll try to do it in my future posts.
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When I started to write this article, I discovered that the reach of $600 price by Apple stocks interested not only me. For example, there's a very good article in the Economist on this topic. I would recommend to read it to anyone interested in the subject.
Here is the link: Apple's share price - iRational?
P.S. My writing may seem incomplete or immature to you, but please try to find a few minutes to write a comment on it. It will help me greatly to improve my future posts, and I will be happy to hear if you like it.
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