Bolaji Ojo EETimes Supply Network (01/18/2008 5:03 PM EST)

Steve Jobs knows what his company has done right. Going by events on the equity market lately, he must be wondering what Apple Inc. is now doing wrong.

Three weeks ago, Apple Inc.'s stock price surged to a record $202.96 high, up 145 percent from a 52-week low of $82.86 putting its market value well above IBM Corp.'s. A few analysts piled in, predicting the company's stock price should shoot above $250, pretty soon.

Apple's stock price has since fallen sharply over the last few days. On Wednesday, January 16, 2008, it fell to a low of $156.70, down 23 percent from the 52-week high. Jobs, chairman and CEO of Apple, won't like this, but I never believed Apple was worth anything near what investors were paying at the beginning of this year, or even months earlier when the stock was even cheaper.

Let me tweak some noses even more. I still don't believe Apple is worth what investors are today paying. The company has great fundamentals but is it worth as much as or more than IBM?

The difference between the companies is that Apple has become a highly speculative stock loved by Day Traders and the like.

Consider this: More than 40 million Apple shares exchange hands every day compared with less than 10 million for IBM (over the last three months.)

If you don't think this is odd, let's throw in additional facts. IBM, a much bigger company with $96 billion in annual revenue (versus Apple's $24 billion) has a price-to-earnings ratio of approximately 15.1 compared with 40.8 for Apple. There's a bunch of other metrics we can dump into this basket but the message is simple: Apple's stock is overvalued compared with IBM's or any of the other major technology companies.

In an earlier blog posted five months ago (Managing the illusion of reality) I questioned Apple's valuation and got creamed by some readers.

Apple, like many other technology stocks, benefited from a run up in stock prices that was driven in part by a surfeit of funds in our economy.

Is it a great, well-managed and innovative company? Yes. Has it introduced some fantastic products over the last several years and redefined itself? Absolutely. Let's recap its more recent achievements and strengths. Apple has in only two fiscal years nearly doubled its revenue to $24 billion as of the 12-months ended September 2007 from $13.9 billion in 2005. Net profits during the same period climbed 162 percent to $3.5 billion from $1.3 billion.

The company has one of the cleanest balance sheets in the technology sector. It closed the last quarter with $15 billion or more in cash and short-term investments and zero debt. Apple's wireless handset, the iPhone, has reportedly sold 4 million units in only a few months; the iPod is still going strong and a surge in new users has increased the overall market share of the company's Macintosh computer.

You can't but admire the company. Step back a bit from the positives and a few glaring concerns emerge, however. Jobs, Apple's chairman and CEO, is both a major sales and marketing weapon and a potential liability.

Once merely a corporate entity with a fanatical following, the company has become synonymous with Jobs, one part of a set of conjoined twins that a successor CEO must carefully separate without inflicting too much damage on the business.

Can Apple do without Jobs? Of course, but the immediate cost to the company and its investors would be extremely high. Jobs and Apple must already know this and I bet they have a plan in place to mitigate the impact of Jobs displacement on the company. My most immediate concern therefore is not how Apple would fare if Jobs were to leave the company. I am bothered more by the fact that Apple has become a speculative stock, a development that typically unhinges a company's valuation from its fundamentals.

The same investors who drove Apple's stock price to its unrealistic high are also now digging a hole under the company as they seek cover in a wilting market.

If Apple was three weeks ago worth approximately $178 billion, why is it worth almost $40 billion less today? What exactly has the company done to shave off more than one-fifth of its value in less than one month and what blinders were the analysts and investors wearing when they touted the stock at its previous lofty price?

I didn't ask Jobs and Apple to comment on this. Companies usually don't like fielding questions on their stocks. And I don't buy the idea that the market simply changed because of problems within the economy. Some of us warned months ago that the run up in stock prices wasn't supportable over time. (See Financial liposuction begins.)

A simpler explanation is that the investment community has always had within its ranks people who pay limited if any attention to corporate fundamentals. Their goal is similar to the one I would have if I had a few million dollars to play with and dream of buying a Lamborghini next week. A few of these people have been gorging on Apple. They will continue to do this until they've squeezed the most out of the company. Once the market sours, these fellows won't be able to spit out companies like Apple fast enough.

DISCLAIMER: THE VIEWS EXPRESSED IN THIS BLOG ARE THOSE OF THE AUTHOR ALONE WHO PROMISES TO BASE HIS SOMETIMES BIASED, POSSIBLY IGNORANT, OCCASIONALLY IRRELEVANT BUT ABSOLUTELY STIMULATING THOUGHTS ON VERIFIABLE FACTS ALONE. ANY COMMENTS SHOULD BE SENT TO THE AUTHOR AT BOJO@CMP.COM.