Are Investors Finally Falling In Love With Apple Again?

These are heady times for the Nasdaq, which broke through the 4000 barrier just in time for Thanksgiving. The tech heavy index hadn't seen that level since plummeting through it on the way down from its March 2000 peak. For the year, Nasdaq has risen more than 33% percent, gaining 1000 points. While that's impressive enough, it's that much more so when you consider the most valuable company on the exchange hasn't done much to help. Apple , which also happens to be the most valuable stock in the world, has lagged far behind in 2013, climbing just 4.5%. The company reached its high of $702 last September, before falling out of favor and seeing its shares plunge below $400 not once but twice. A closer look at the market's reaction to Apple since the second of those 'tests' of the $400 level suggests sentiments may be changing toward the iPhone maker.

What's in a date anyway?

It's good to keep in mind that while we tend to mark time with the new year, it's really just another date on the calendar. March 10, 2000 was Nasdaq's record high of 5048. If we look at investing in the index since then, it's been a terrible bet, returning negative 20% over the span (dividends might have helped, but we'll ignore those for this and further calculations). But nearly 9 years later to the day, on March 9, 2009, the index stood at 1268. Buying a basket of Nasdaq stocks then would have netted you a return of 220% since - a triple on your money in 4 1/2 years. Comparing those same dates for Apple brings up a share price of $31.43 in March of 2000. A dollar invested in the 'failing' computer back then would be worth $30. But if you'd missed out on the early turnaround and 'merely' bought shares in March of 2009 for $83.11, you'd still have close to a 7x return - far outstripping the Nasdaq over the same span.

That historic run Apple had (the stock traded at $3.32 in December of 1997), while interrupted many times for backpedaling and marked by fairly low price-earnings multiples nearly throughout, seemed done when Apple headed south late last year and stubbornly refused to join the rally early in 2013. But as the included chart shows, Apple made what's increasingly looking like a bottom on June 27, at $393. The stock bounced off $390 in April, rallied briefly into the mid-$400s and then began falling again. Until it stopped for no particular reason. The first-quarter GDP numbers came out that day and were weak, but Apple news was thin. The Wall Street Journal wondered, ' Why Is Apple Still Wrangling Over E-Books?' in reference to the company's decision to fight the Department of Justice when book publishers had chosen to settle.

Yet the stock began to rise and has mostly been on a tear since. Consider that in the ensuing 5 months, the Nasdaq and Google are each up about 20%, while Apple has added 41%, essentially matching Amazon's stellar gains through the period. On a comparative valuation basis, it's impossible to argue the market has fallen back into love with Apple. Google trades at 35 times earnings, Apple sits below 14, a slightly lower multiple than Microsoft . That last fact would be unremarkable except that analysts on Wall Street believe Apple will grow its earnings by more than 14% annually over the coming 5 years, nearly twice as fast as their forecast for Microsoft and very nearly as fast as Google's 16%. Still the search giant is valued more than twice as highly relative to earnings.

Share and share alike?

Clearly there is still some gap between Apple's share price and fundamentals, at least some of which surrounds the company's prodigious cash balance. Investors from Carl Icahn to David Einhorn have called on the company to do something more aggressive with the more than $140 billion that still sits on Apple's balance sheet. That amount remains even though the company has been buying back its stock to the tune of tens of billions. Einhorn recently was on CNBC suggesting, 'More could be done that would unlock probably even more value, but it's not so bad at this point that I want to complain about it.' But the idea that the share buyback is responsible for the change is sentiment flies in the face of the numbers. Apple retired 39 million shares in the past year, barely 4 percent of the total outstanding. Most of that occurred in the 3 months between April and June, when the stock was testing its lows.

In the last fiscal quarter, Apple shares rose while the absolutely magnitude of the buyback slowed with just 15 million shares retired against 21 million in the prior quarter. (It's worth noting those totals don't precisely reflect the amounts bought back as the company is constantly issuing new shares to employees via restricted stock units and options. The figures above merely reflect the reductions in total shares as reported on the financials). Considering current share prices, the remaining billions devoted to the buyback will likely remove another 5% or so from Apple's total outstanding shares. While that's significant for a valuable company like Apple, it's a drop in the bucket compared to a 40+% gain over 5 months.

Grow where you wanna grow

What the recent run fails to tell us is whether there's more to come. Analysts spent so long being in love with the company and slapping $1000 price targets on Apple that never materialized that the same cadre of 'experts' now is cautious. Some of that is warranted. Apple has seen its earnings flat to down in recent quarters. The company hasn't been able to match its peak in gross margins and has seen demand for its computers and tablets flatten out even while iPhone sales have risen. There is strong reason to believe the new iPad Air and Retina iPad Mini will reignite growth for Apple in that category but how much and for how long is a wildcard.

And the company remains more reliant than ever on the iPhone, which by contrast has seen growth that unsophisticated observers can't fully grasp. On the one hand, the overall smartphone market is far outstripping the iPhone's uptick, in both raw totals and percentage gains. On the other hand, evidence from IDC, comScore, and even Samsung itself suggests Apple is taking share in the upper end of the market from everyone. And iPhone sales have surprised to the upside each of the past two quarters. Still, there are concerns. The new iPhone 5c, while perhaps not a bust, isn't a smash hit either. Since the launch, advertising in the U.S. has been minimal and its presence on the streets seems to be as well. While there is little doubt the 5c is holding its own as the 'middle phone' in Apple's lineup, there is much reason to question whether it has succeeded in expanding the market for iPhones much if at all. The plus side for Apple has been more sales of the higher-end iPhone 5s.

But Apple has yet to answer questions about how - or even whether - it's going to expand its customer base. Not to the level of the new Moto G, at $179 for an unsubsidized phone, but outside of the $450 and up category, which puts its products out of reach of many of the next billion smartphone customers. Supporters of the company have continually defended Apple's choice to ignore the entirety of that market, reminding that it makes most of the mobile industry's profits. But that profit pie has stopped growing, which is what got Wall Street to turn on Apple last year. For the moment, it has turned back, at least in part due to questions about whether Samsung has been hurting Apple as much as was feared. Apple is very likely to report a terrific quarter on the strength of its new product lineup, though a reasonable argument is that part of the stock's run up reflects that expectation.

The question for CEO Tim Cook and the Cupertino gang is what comes next. Though it's just another date on the calendar, we'll have to wait until in the new year to find out.

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