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Apple picking
Wall Street analysts have missed the boat on Apple's big stock move. So why listen to them now?
August 28, 2003: 1:17 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Apple is the Rodney Dangerfield of the technology industry. No respect.

Even though the company's iTunes online music store is doing boffo business and its new Power Mac G5 has been met with mostly great reviews, the consensus rating among Wall Street analysts for Apple's stock is a 2.9, according to First Call.

Ratings go from 1 (a Strong Buy) to 5 (a Strong Sell). So this is essentially a Hold recommendation which, as most investors know, is a nice way of saying Sell.

Only two of the 14 analysts that track the stock rate it a Buy.

In some ways, a wary stance makes sense. Shares of Apple (AAPL: up $0.41 to $21.89, Research, Estimates) have surged 61 percent since iTunes debuted in late April. And the stock now trades at more than 60 times earnings estimates for fiscal 2004, an extremely rich valuation.

But then again, why should investors listen to Wall Street? Analysts were even more bearish back in late April, when the stock was trading at $13.35, despite its $4.5 billion in cash and negligible debt load.

"Apple has always been the oddball in the computer industry but without question they come out with the best products and they have so much cash. I'm a big fan," said Matthew Kelmon, president of Kelmoore Investment Co, which owns 100,000 shares of Apple.

Business has momentum -- but analysts don't see it

The criticism that Wall Street consistently makes when evaluating Apple's prospects is that it's a niche company that will never supplant Microsoft.

Well, no kidding.

Only the most delusional of Mac freaks still hold onto the dream that most of Corporate America will one day wake up and decide to get rid of their Windows-powered PCs and switch to a Mac.

But Apple doesn't need to change the world. It can coexist with Microsoft (a Windows version of iTunes is due out by the end of the year) and is slowly but surely becoming more than just a cultish PC company.

Thanks in large part to the success of the iPod digital music player, sales of non-PC hardware and peripherals for Apple's fiscal third quarter (which ended in June) increased 93 percent from a year ago. Revenue from all the non-PC hardware business accounted for 18.4 percent of Apple's total sales, up from 10.4 percent last year.

iPod alone accounted for 7.2 percent of total revenue in the latest quarter, compared with just 1.5 percent a year ago, as iPod sales surged 405 percent. Software and services revenue also increased at a healthy pace from a year ago, up 37 percent.

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The boost in peripherals, software and services is important, since they have higher profit margins than manufacturing and selling Macs.

To that end, earnings expectations for fiscal 2004 (which ends next September) have been rising. Analysts expect Apple to earn 35 cents a share, up from projections of 26 cents just three months ago.

And the company is expected to post robust year-over-year sales growth in the coming quarters despite continued concerns of a soft IT spending environment, with estimates of a 15 percent increase for its fiscal fourth quarter and an increase of 23 percent in its fiscal first quarter, which ends in December. Other than Dell, no other hardware company can boast of sales growth this strong.

This momentum makes Apple's stock, even at the currently lofty levels, a bit more palatable. It seems that Apple has a better chance than, say, Hewlett-Packard or Gateway of being able to surprise Wall Street with better than expected sales.

Shorts are staying away

Finally, it's worth noting that Apple has not been lifted by short squeeze rallies, which have helped push several tech stocks higher this year and tend to be fleeting occurrences. Short squeezes occur when investors rush to buy back shares they borrowed and immediately sold.

A high level of short interest, or the total number of shares being held by short sellers, is typically a negative indicator, since it implies that many professional investors think a stock is a ripe for a fall.

But the peak short interest total Apple has had this year was 18.6 million shares in May, just a little more than 5 percent of the float, or total available shares. As of mid-August, only 3.3 percent of the float was being held short. So despite the stock's meteoric rise, professional investors aren't betting against it.

Of course, investors should be more wary of the stock now since it has enjoyed such a sizable spurt in a relatively short period of time. But don't look to Wall Street analysts for clues to Apple's future. They just don't get it.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.