This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Apple Crash Portends Tech Stock Crash

You know I'm not a valuation guy, but sometimes it's a relevant thing to bring up.

How can investors value Netflix -- a company with scant free cash flow, another debt financing on the horizon, billion upon billions in off-balance sheet obligations and fierce competition in an environment where it simply cannot control its costs -- at a P/E ratio of 206 and Apple at just 13, before the crash (!)?

Consider Microsoft (MSFT - Get Report), a company investors assign basically the same value they do Apple (as of Monday's close).

We're running around cheering (MSFT popped 2% the day after earnings) the allegedly amazing quarter Microsoft had thanks, in part, to Surface tablet sales yet, as Timothy Stenovec first observed over at Huffington Post, the so-called success of this inferior tablet is tantamount to a lie.

Must Read: Jim Cramer's 6 Stocks in 60 Seconds: LULU BTU KSU TOL POT CMG (Update 1)

As Stenovec points out, Microsoft reported Surface tablet revenue of $893 million, yet it cost $932 million to generate that revenue. At least in the consumer market, this is a desperate company with hardware -- outside of Xbox -- nobody wants. They have to give this trash away.

We could go on and on. We could go company by company through the broad tech sector. Point by point. And, over and over again, Apple would come out on top, by leaps and bounds. From its balance sheet to its product line to the prospects of what it might do next -- outside of (AMZN - Get Report) and Starbucks (SBUX) -- no other tech companies compare.

All of this is not to say, NFLX is overvalued or MSFT should be valued lower. Not at all. Again, I don't play the valuation game. You can't in this market.

However ... and this is the important part ...

If this is the party we're going to snort coke at -- NFLX at a P/E of 200, AMZN at a P/E of 1,400 (forward P/E of 145) -- there's no reason not to let AAPL in on the fun. It deserves a glass coffee table (like the one Steve Ballmer fell through last year), a razor blade and a straw as much as the next guy.

However ... and this is the even more important part ...

If we're going to leave Apple out and, for all intents and purposes, assign it different rules simply because it has set the bar so high for itself, we better get ready for all hell to break loose. Because that's what we're setting ourselves up for.

If Amazon lays an egg even the greatness of Jeff Bezos cannot overcome on Thursday, the bottom could fall out of that stock. Same goes for NFLX down the line if that company's bears live to fight another day. When one of these names cracks, investors are going to start more critically considering other high flying stocks in tech.

If you're long tech, you don't want to see that happen.

Investors will look at social media companies that are doing little more than testing strategies they kind of, sort of think might have a chance at generating sustainable amounts of advertising revenue. And they're going to knock their respective blocks off. Once an AMZN or NFLX falls, expect Facebook (FB - Get Report) and/or Twitter (TWTR - Get Report) to follow. And the dominoes will tumble down in market crashing succession.

Because the last thing you want if you're long companies that couldn't hold Apple's jock strap in a bye week is for investors to turn a critical eye to their businesses.

There's irony in this, albeit, speculative, hell just broke loose scenario -- tech investors will seek stability. They'll go bargain hunting and, lo and behold, they'll find AAPL sitting there bruised and battered.

Upon critical inspection (there's a concept!), they'll conclude that if they're going to get long anything tech it should be the most stable and promising company in the world. Apple will then lead the recovery and subsequent rally. And, finally, common sense will prevail as close as we're ever going to get to across the board.

--Written by Rocco Pendola in Santa Monica, Calif.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks. Rocco Pendola is a columnist for TheStreet. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.02 0.00%
AMZN $502.13 0.00%
FB $104.07 0.00%
NFLX $82.79 0.00%
MSFT $50.16 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs