Santa Claus seems poised to shower the world with millions of millions of iPhone Xs this Christmas. Despite the worries of pundits, Apple Inc. (NASDAQ:AAPL) seems to have another mega-hit on its hands, which will not only deliver the normal 25% margins, but billions of dollars in ongoing service revenue, as users increase their iCloud storage, Apple Music subscriptions and app purchases.
The world’s greatest moneymaking machine is expected to deliver $85.8 billion in revenue for the quarter, and $3.75 per share of earnings, when it reports Christmas results on Feb. 1 of next year. Compare that to the $78.35 billion in revenue and $3.36 per share of earnings delivered last year and everything appears ho-ho-hokay at the Spaceship campus.
Is there anything even remotely grinchy in this analysis? Yes, there is.
It’s all too expected.
Much of the 54% growth in Apple’s stock valuation achieved over the last year is due to an expansion of its price-to-earnings ratio, not to its own growth.
At its Dec. 5 opening price of nearly $170 per share, Apple is trading at a P/E ratio of 18.5. A few years ago, it was at 12. Apple earnings, like Bitcoin, have grown dear.
Unlike Bitcoin, of course, Apple earnings are real, but the question is always what they are worth. The trailing 12-month earnings of $9.21 per share aren’t any better than 2015’s $9.22, announced when the company’s shares were selling at roughly $120 each. It’s true the dividend has risen since, but only from 52 cents per share to 63 cents per share.
A lot of Apple’s rise, in short, is due to the market pricing everything higher.
Meanwhile Apple faces some headwinds.
Apple is going to start paying the Irish government $15 billion in back taxes early next year under orders from the European Union. The Paradise Papers, which describe how the world’s wealthy elites avoid paying taxes, didn’t spare Apple, saying that when its Ireland ruse was discovered, the company simply transferred profits to the British island of Jersey.
Apple insists it pays all the taxes it owes, but the real question is whether Apple is manipulating its books in order to pay as little as possible, and the company’s statement is a non-denial denial of that.
Does this matter? Well, French activists recently occupied an Apple Store in Paris to say it does.
Many investors forget that Apple’s iOS does not dominate the market. U.S. market share fell in October to about 33%, down from over 40% a year ago. Much of that was due to the delays in delivering the iPhone X, which, in turn, took attention away from the iPhone 8, but the share of the U.S. market held by Google Android from Alphabet Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) is up to 66%.
Apple continues to have trouble with musicians, who claim it has reduced the quality of digital music and destroyed its business model. Software rollouts can be hair-raising, with users openly asking if upgrades are worth it (they are, if only for security).
This litany of trouble is relatively meaningless, unless you consider that Apple shares are already priced to near-perfection. For a manufacturing company with no earnings growth to be priced at 18.5 times earnings is extraordinary.
Apple is an extraordinary company. But if the market tanks, Apple tanks. When Apple sneezes, the economy catches cold. That’s what investors should be worrying about when they look under the Christmas tree a few weeks from now.
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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.