Apple announced results last night that came in better than Wall Street was anticipating. Instead of reporting a drop of about 10% in quarterly net income on a year-over-year basis, Apple reported 10% growth.
Results were driven by higher than expected sales of Macs and iPads. Shouldn’t be a big surprise with so many people working from home. But extrapolating those trends out for more than a quarter or two would be a mistake. A mistake that Wall Street analysts were of course more than willing to make. Taking a short-term trend and extrapolating forever into the future is apparently part of the job description.
And so, like clockwork, the price target upgrades came this morning. Apple shares have jumped over 10.5% today on the upgrades and beat.
No big deal you may assume. Stocks often move 10% or more on an earnings beat.
True, but that 10.5% rise in Apple shares is a market value increase of $169 billion on an additional $1 billion in income.
There are only 33 companies in the U.S. with a market value that is more than Apple’s market value increase today.
What’s more, is six months ago, Wall Street was expecting net income of $11 billion this quarter vs. the $11.2 billion Apple reported. Six months ago Apple’s market value was $463 billion less than it is today.
On January 31st of this year, Apple had a market value of $1.354 trillion. On that same day, analysts were anticipating Apple would earn $60.6 billion in 2020, $64.7 billion in 2021, and $67.9 billion in 2022.
As of this afternoon, Apple shares are valued at $1.817 trillion. Following the earnings beat, Wall Street analysts upgraded their earnings estimates from yesterday’s levels. For 2020, the street is now looking for net income of $56.7 billion in 2020, $64 billion in 2021, and $66.5 billion in 2022.
Notice anything here? Yup, each estimate is lower than it was in January. And yet, the market value of Apple shares is $463 billion more now than it was then.
There is a major bubble in this market that has been fueled by a liquidity and risk underwriting exercise at the Federal Reserve. Investors unaware or still relying on financial infotainment to make portfolio decisions are likely to face nasty blowback when this ends.
Apple is every bit a part of the bubble as are Tesla and others like it.
The good news for value-oriented investors who haven’t forgotten how to do basic arithmetic is, there are still plenty of reasonably priced opportunities in the U.S. and foreign markets.