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Why Apple is OverValued and the IPhone 4 will be its demise

Posted on Jun 9, 2010 by Paul White

Apple LogoBefore I get a flood of Apple Fans emailing me, and telling me to go F myself, please read my complete blog in detail before you jump to conclusions.  To make a long blog post short, I feel that Apple has finally hit a point where its getting too much media attention.  This attention will create unrealistic expectations for both consumers and investors.  As a result I feel their stock is overvalued.  The price is currently being driven by speculators who are making decisions by pure emotion and hype rather than looking at the fundamentals of Apple as a company.

Apples Rise to Power

Ever since Steve Jobs came back, he is taken a company that was on the brink of collapse, to a level where its market cap is now larger than its long time rival Microsoft.  This has been mostly from the success in the IPOD, and IPHONE.  Even though sales in their desktop and laptop sales have continued to make modest gains, they are still a minority with consumers for home computing.  One of the reasons Apple has done so well is because the life cycle of Mobile products is much shorter than a desktop computer.  A person might buy a new computer every 5 or 6 years.  But they often buy a new phone every 1 - 2 years.  The technology and networks for phones have been advancing very quickly.  In 2000 Mobile web on a phone was text only.  Today mobile data plans have speeds that combat that of your home's broadband internet connection.  The ability to share photos, videos, and text has become easier than ever.  Apple has stayed on the front line of this evolution, bringing products to market that most other companies don't believe consumers are ready for.

AT&T is Apple's Weakness

After Bringing 3 Iphone models to market, one thing was obvious.  Apple can make a great phone that does tons of stuff, but Apple does not run the AT&T network.  After the launch of the first Iphone, the reports of dropped calls became a huge problem.  The Iphone could do everything except make calls, especially in areas like NYC.  The Phone also had problems getting a good solid 3G signal.  Some blamed the Iphone's construction, claiming the metal body case of the first Iphone's caused reception problems.  Others blamed AT&T's network.  I personally feel it was more of AT&T's network than anything else.  I use to have a Sony Xperia X1i with AT&T, and even though the HSDPA data was great.  I constantly was dropping calls inside my house.  Now I have an HD2 with Tmobile and don't have problems with dropped calls, but their 3G reception indoors is non existent.

Iphone 4 reception

This is a big question consumers have.  Everyone knows the problems the previous Iphone models have with reception on AT&T's network.  So the question is will this phone have the same problems.  Steve Jobs in his demo of the phone a D8, focused on the improved antenna design, but made no promises that anything on AT&T's side had been improved.  Then he tried to establish a 3G data connection during the demo, and it failed.  At this moment Steve could have said FUCK and it would have been a well chosen word for his situation.  He told everyone that the reason it couldn't connect was because so many other devices in the room were on 3G.  But it didn't matter, the action of trying to connect and not being able to was too powerful.  The Iphone was an excellent piece of hardware, but instead of focusing on what improvements were made, the news media focused on Job's failure of getting the device on a 3G data connection.  The next day on CNN Headline news, the only thing mentioned about the Iphone was Jobs not being able to connect.   Now you would think that AT&T would have maybe allocated some more bandwidth to the towers in the area, to make sure Jobs would be able to demo the device.

Theories on why the IPhone 4 couldn't establish a connection

1. AT&T's network sucks, and no fancy antenna would help
2. The network was truely over capacity due to the high number of 3G devices in use.
3. Someone in the audience had a device that could create interference, but this is highly likely because nobody else in the room seemed to be having connection issues live blogging the event.
4. Iphone 4 still has some bugs with its antenna.  Hopefully they get these worked out before june 24th.

High Expectations may be unreachable for the Iphone 4
Quarter after quarter Apple has raised the bar for standards and expectations.  But this comes at a cost.  They are expecting the Iphone 4 to be a huge success.  But what if its only a moderate success?  The problem is Apple's stock price is inflated by speculators who are buying into the hype.  In my opinion its stock is Over-valued.  Market cap is higher than Microsoft, but this is only a very narrow view of the two companies.

Comparing AAPL to MSFT

Market Cap: 226 Billion
Profit to Earnings 21.16
Pays no Dividend

Market Cap: 220 Billion
Profit to Earnings: 12.98
Pays 2% dividend

If we evaluated these two stocks by the fundamentals it would be obvious that Apple is Over Valued.  Steve Jobs has already been getting heat from investors about why he isn't paying a dividend.  His reason was he doesn't want to bring down his stock price.  After all if he paid a dividend, his stock price would drop, and the stock would normalize.  The only thing keeping the stock up is the perception of future earnings.  Even if the future earnings of Apple are good, at this point the Market is expecting something greater.  The hype in this stock has caused a large number of speculators to jump in.  While large institutions are getting out.

Apple under estimates Android

by the end of the year there will be a large number of powerful devices running the Android OS.  The HTC EVO is one,  The HTC HD3 is another rumored device ( which will be far superior to the IPhone ).  These devices will be available on networks like spring and verizon which don't seem to suffer from the dropped calls like AT&T.  People only want to buy an Iphone 4 if its not going to drop calls.  Apple would have been smart to release the Iphone 4 on verizon.  I have a feeling that sticking with AT&T may become a decision that Jobs will regret.

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