Apple Post Mortem: Made Money But Thesis Was Wrong

“With Apple, its tech and tech changes rapidly. Although I feel confident that Apple will be making more in 2013 it gets increasingly foggy thereafter… At 12x times earnings you are not paying for incredible earnings growth. I view Apple as a call option where you won’t impair the majority of your capital due to earnings over the next 2-3 years (in my opinion) and if things work out well you benefit in tremendous upside. “

That sounds reasonable and is pretty much the case for the bulls today. However, here’s my problem with it:“you won’t impair the majority of your capital due to earnings over the next 2-3 years”

Excuse me?? How could just 2-3 years of earnings allow me not to impair the majority of my capital?Apple Inc. (NASDAQ:AAPL) had made $28 per share in 2011. Even if earnings grew at 33% for 3 years it would still only bring in income of $152.63 (37.24+49.52+65.87). Even adding back $75 of repatriated cash at the time (not today to avoid double counting) we still only get $227 per share of capital (assuming no value destroying acquisitions).

The stock was a little under $500 when I was buying. Hmm….

How would just $227 of cash and earnings protect me from impairing my capital? Well, it wouldn’t, its simple math. Somebody should have called me out on this on the comments, feedback is one of the reasons why I created the blog!

Obviously, I wasn’t expecting earnings to fall of a cliff (and of course so far they haven’t) but that was the mistake. In the same paragraph I had written:

“Although I feel confident that Apple will be making more (earnings) in 2013 it gets increasingly foggy thereafter.”

I should have given more thought to how sustainable 27% net profit margins and 35% return on equity are. Obviously, if I were following the checklists that I now write about all the time, I probably would have been more careful.

The competition such as the Samsung Galaxy S III is more than just good enough, its a great device and android phones have closed the gap. This can only hurt margins. In my opinion, Apple Inc. (NASDAQ:AAPL) was less about the ecosystem that the bulls point to and more about a single product that was dramatically ahead of its time. The increased competition and the potential for margin compression is ultimately why I sold Apple Inc. (NASDAQ:AAPL).

Is Apple overvalued? It largely depends on the success of new products, but like the Brooklyn investor says; at these prices Apple is just speculation.

I’m still a massive Apple fanboy but loving a company and loving the stock are two different things.