When a company’s market cap grows, its stock is supposed to grow less volatile. This is just the law of large numbers. Bigger numbers get harder to move. When they move quickly, it’s a danger sign. That’s how I read the big moves in Apple Inc. (NASDAQ:AAPL) and Alphabet Inc. (NASDAQ:GOOGL) following an analyst’s decision to downgrade the former before its developer conference, and upgrade the latter.
Within a half-hour of the market’s opening for trade on June 5, shares of GOOG and GOOGL — the non-voting and voting shares of Alphabet — both rose nearly $10 per share to eclipse the $1,000 mark. Based on the nearly 650 million shares outstanding, that’s almost a $6.5 billion gain, on no real news.
By contrast, AAPL shares dropped $1.31. That doesn’t sound like much, but with 5.25 billion shares outstanding it’s a loss of $8.5 billion.
Why So Volatile?
So far in 2017, big tech stocks like Apple and Alphabet have been about the only things working well for investors. Small investors have piled in. GOOGL is up about 27%. That’s a gain of over $186 billion. The gain in AAPL stock is even more spectacular, a 33% score adding $268 billion to the market cap.
Both companies have reported good results. For Alphabet, there has been a 20% improvement in year-over-year revenue, as well as net income. For Apple, the gains have been more modest, just 4% in sales, about 10% on net income.
Looking at those results, a preference for Alphabet over Apple seems normal, not like news at all.
That is not how it is being treated.
In fact, both stocks are being overvalued. Shares of GOOGL are now trading at a price to earnings multiple of over 32. AAPL is closer to the market multiple, at 18, but the stock was trading at just 12 times earnings a year ago. Investors are valuing these earnings higher than they are valuing the rest of the market, and they are valuing growth in both companies higher than the rest of the market.
Why It Matters
You might argue, why worry? The whole market is going up.
But Apple and Alphabet are a rising, and disproportionate, share of the market. The Nasdaq Composite, in turn, represents 10.7% of the world’s total market capitalization and is considered overvalued, at $7.5 billion a year ago.
Apple and Alphabet together represent more than 20% of that old market cap figure, so it makes sense that their gains cause the Nasdaq to rise.
Sure enough, the Nasdaq is up 27% over the past year.
It adds up to a bubble — a bubble in stocks that work, in companies that provide excellent products and services, but a bubble nonetheless.
Popping the Bubble in AAPL and GOOGL
The problem is that any precipitous fall in the value of Apple and Alphabet will have the same disproportionate impact on the averages that their rise did. And when bubbles pop, they do so spectacularly, all at once.
If Apple just dropped to a price to earnings multiple of, say, 15, that would be a loss of $115 billion in market cap. Trade Alphabet at a reasonable P/E of 25 and investors are out nearly $200 billion. Wipe $315 billion off the Nasdaq’s market cap, and you have a panic that is bound to send other shares down hard.
This bubble will pop, and investors are going to be very sad when it does.
Since the companies are both in good shape, I would expect them to bounce back quickly, within a few years. But if you need that money sooner, it may be time to get out.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and GOOGL.
