Again, investors are amazed. They are amazed both by the magnitude of Apple's (AAPL) earnings beat and by the seemingly weak reaction to the numbers.
"It can't be!" people think, when faced with another 100%-plus earnings growth number and still the stock trades at a forward P/E of just a little over 10. And to rub it in, although the stock started trading at $460-$468 in the after-hours session Tuesday, it then does little else but slide, even below $450 in today's session.
It seems as if the market is irrational, and while it willingly puts insane 100-plus multiples on stocks such as Amazon.com (AMZN), whose earnings are now expected to be below those registered back in 2004, it doesn't reward Apple's much more extraordinary performance at anything close to that.
And yet, the reason is somewhat simple. As I've shown in a previous article, Apple is mostly about the iPhone, with it representing anywhere from two-thirds to three-fourths of Apple's gross margins, and hence, earnings. And these latest earnings, while incredibly extraordinary, did not change that basic premise - indeed, they reinforced it. Apple is not Apple, Apple is the iPhone. And the iPhone, with 37 million units sold in the latest quarter, and estimates that will go north of 120 million for the whole of 2012, is approaching the potential market for a $600-pkus device, even if subsidized (since the subsidization will be implicit on the contract price).
So the problem the market has is with the iPhone, more than with Apple. The market sees the iPhone as a product that's approaching saturation, and sees Apple mostly as a single-product company, even if that's far from true. The thing is, with three-fourths of the earnings coming from the iPhone, the market cares little about anything else, unless, of course, Apple can come up with a similar, mass market, success. This is the reason why speculation with the iTV could have had so much impact.
There are also other reasons why the market has a problem with the iPhone. One of them is that no matter how popular a consumer product is, there always seems to be a point where the public loses interest and goes for something new. The past is filled with examples, from the famous Sony (SNE) Walkman, to the Rio PMP MP3, through many other products. The market, understandably, has a hidden fear that this too will happen to the iPhone. In fact, the iPhone, while being a consumer product, might well have much higher barriers than what the market estimates. This is because the iPhone is not really the iPhone, but an entire iOS ecosystem, and to beat an ecosystem is much harder than to beat a single product.
Conclusion
Given Apple's dependence on the iPhone, it is unlikely that the stock will experience multiple expansion. This means that the performance that can be expected from AAPL stock is at most, the performance that comes from the company's growth.
For there to be multiple expansion, Apple will have to successfully enter an entire new market that has the potential to be at least as large and profitable as the iPhone's.
Disclosure: I am short AMZN.
