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A financial bubble is a condition in which a rapid expansion in a particular market or asset is followed by a steep contraction. Prices often rise far above where they should be, considering fundamentals or intrinsic value. With the tech and housing bubbles still in recent memory, investors are on the look out for the next major bubble more than ever. With Apple’s (NASDAQ:AAPL) latest accomplishment, some may consider it to be the next great investment to pop. However, is the world’s most valuable brand really that bubblicious?
On Monday, shares of the tech giant closed 2.6 percent higher at $665.15. The move made Apple the most valuable company by market capitalization in history, surpassing Microsoft’s (NASDAQ:MSFT) lofty peak value of $618.9 billion set in 1999 during the now infamous tech bubble. With more than 937 million shares outstanding, Apple boasts a market value of $623.5 billion, easily placing it ahead of other current large caps such as Exxon Mobil (NYSE:XOM), Walmart (NYSE:WMT) and International Business Machines (NYSE:IBM). Apple’s recent one-up on Microsoft in the history books may concern bubble watchers, though.
Apple is now the most valuable company in history, but it should be taken into context before predicting a dotcom-like demise. Microsoft’s market value peak of $618.9 billion occurred nearly 13 years ago, before another decade of dollar devaluation took place via central banks. Using the inflation adjustment calculator at the Federal Reserve Bank of Minneapolis’ website, Apple’s market cap would have to reach about $862 billion before breaking Microsoft’s record on an inflation adjusted basis. In order to accomplish this amazing feat, Apple’s share price would need to hit $920 per share, given its current amount of shares outstanding. Thus, to truly be compared to Microsoft‘s euphoric market value and fallout, Apple shares need to increase almost another 30 percent.
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The price action alone in Apple is often enough to ignite bubble talk in some investment communities. Shares have jumped 64 percent year-to-date, and more than 330 percent in the past five years. However, price action by itself does not necessarily form a legitimate bubble, the fundamentals still matter. Apple trades at a current price-to-earnings ratio of about 15 and a forward ratio of 13. These are hardly unreasonable valuations. Google (NASDAQ:GOOG) and IBM also trade at very similar forward ratios. In comparison, Microsoft traded at a price-to-earnings ratio north of 60 during the tech bubble.
With that being said, it does not mean Apple will continue its impressive rise without hiccups. Shares in the company often see a run-up in the months prior to a major product launch and pullback on the actual release announcement. This is referred to as “buy the rumor, sell the news.” Shaw Wu, senior technology analyst at Sterne Agee, explains, “The stock tends to trade well into product announcements. The big one obviously is the next generation iPhone, we think the stock will likely trade well into that, but after that, it takes a little bit of a breather, short-term. If you look at the previous launches, iPhone 4, 3GS, its a near-term thing that could put a little pause in the stock.”
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