AAPL is NOT worth $460

I subscribe to a nice blog on value investing. Today they presented a financial analysis of Apple. Blog’s author’s conclusion is that even if one assumes zero growth in foreseeable future, Apple stock is working investing in.

To me this blog demonstrated how one can reach wrong conclusions by looking at partial data. Conclusion in that blog depended on current financial position of Apple and its cash in hand.

However you will reach a totally different conclusion if you take a look at quarterly reports for Q4 2012 and prior 2 years. These reports share Apple’s revenue by product for 5 primary product lines (Mac, iPod, iPhone, iPad and iTunes/Software services) plus accessories. Data provided in these reports also let you estimate revenue per unit for first 4 product lines.

Analysis of that data reveals that

1. iPod market is a declining market, even though revenue per unit is steady. It contributes only 4% towards total revenue.

2. Mac market remains steady, revenue per unit is steady. It contributes only 7% towards total revenue

3. iPad total revenue has remained stable; however revenue per unit has declined drastically. It shows that Apple is facing strong competitors and is really fighting on price per unit. This segment contributes 20% towards Apple’s total revenue

4. iPhone segment’s Qtr over Qtr revenue growth was 129% in Q4 2011. In Q4 2012 this growth is down to 28%. Price per unit remains steady. This segment contributes 56% towards Apple’s total revenue.

It is easy to conclude that Apple’s growth engine for last three years have been its iPhone (primary) and iPad (secondary) products. It is also very clear that significantly strong challengers in these segments have appeared during last two years. Samsung has in fact overtaken Apple in smart phone market.

Author’s comment, “With their management, pricing power and business strength, they are able to invest money in ways I cannot dream of”, is not really validated by any management decision that Apple has shown in last 2 years. Apple’s growth was due to its ability to create innovative products and define new markets. Current management has not demonstrated that. It is risky to assume even zero growth year over year.

A cash pile or large market cap is no guaranty of continued market dominance. Hewlett Packard is a good example. For last 10 years this once great innovative company is trying to find its way. Once valued at more than $110 billion, its today’s valuation is $33 billion. Another good example is RIM. Stock price of this company, once darling of corporate users, has tumbled from a peak of $225 to $14.58.

Apple perhaps has another magic trick up its sleeve and may come up with another great product. However that is only a speculation, and unless Apple management provides some proof, I will not be betting my money on Apple at today’s price.

I look forward to your comments on my analysis.