Here’s Why Apple’s Stock Is A Sell

Jan 27, 2016

If you are looking to build a better value trap, it might be hard to beat Apple.

Arguably the world's most admired company has a price-to-earnings ratio—after Tuesday's earnings announcement—of 10. That's lower than the average P/E ratio of the stocks in the S&P 500, which is 19. It's lower than the 22 P/E ratio of Fastenal, which makes actual nuts and bolts. It's also lower than the company that sells those nuts and bolts, Home Depot, which has a P/E ratio of 23. It's also cheaper than supermarket chain Kroger, which has a P/E of 23 and sells actual apples.

And Apple's (aapl) P/E ratio includes its cash. If you exclude that, which is something analysts do, Apple's P/E, even after factoring in taxes, would drop to around 7.

Indeed, there are a lot of reasons to think that Apple's stock is cheap. Its earnings have increased by nearly 20% in the past year, although that slowed dramatically in the fourth quarter. And the company has very high profit margins, something that typically yields a high P/E. On top of that, it has 1 billion users that buy songs and movies and games and other applications through the company's iPhones, iPads, and other devices.

A low P/E ratio is supposed to signify to investors that you are getting a good investment, as it measures how much in earnings a given company is producing for every dollar you are investing in that company. For Apple, that's a little over $0.14 a year per every dollar invested. By comparison, for the S&P 500 overall, that figure is $0.06.

But in the past, buying a low price tech stock of a company that has seemingly reached the apex of its business prowess is not a surefire win. For instance, IBM (ibm) had a P/E ratio of 11 in 1984, when the company dominated the personal computing business. That year, the company's earnings rose 19%, its third year of double digit growth. However, shares of IBM went nowhere over the next two years. During the same period, the S&P 500 rose nearly 45%. Over the next five years, IBM's shares fell 23%. Meanwhile, the stock market rose a little over 111%.

The same thing happened with Microsoft (msft). Shares of the ubiquitous software maker were trading at a P/E of 18 in early 2004, which was cheap particularly for a tech stock. In some quarters, earnings at Microsoft were growing by as much as 80%. It actually wasn't a good time to buy. Microsoft's shares went on to drop 26% over the next five years.

Then there's Fannie Mae (fnma). Not a technology stock, but it too dominated its business of mortgage insurance and was often referred to as a value stock. At the start of 2004, its shares traded at a P/E of just 10. Five years later, the housing bubble burst, the financial crisis was raging, and Fannie's stock was down 99%.

None of this means Apple's shares aren't a buy right now. But it's a reminder that Mr. Market often gets wind of problems before they arise. Those 1 billion users should be a source of massive recurring revenue for Apple, sort of like how a razor maker continues to bring in money off of blade sales. But Apple is still dependent on selling more iPhones, which generates 70% of its revenue. Years after the first iPhone came out, that could be a problem, just ask Mr. Market.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions