Is the Apple share entering bubble territory? Well, er...

John D Rockefeller, an American oil billionaire and investor in the early 20th century, loved telling this story of how he escaped the Great Wall Street Crash of 1929.

He got his tip to sell before the crash from a shoe shine boy, who began talking to him about “insider stock tips.” Since there were few things about stocks that Rockefeller did not know, he came to a simple conclusion. If shoe shine boys start investing in stocks, it was time for the pros to get out.

Rockefeller did get out completely - he sold every single share he owned - and moved to cash. Cash is crash without the “r”.

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This is the same logic that prompted Aswath Damodaran, who practically owns the word “valuation” by being the author of several books on stock valuation and security analysis, to dump all his Apple shares recently.

He told Bloomberg TV: “I didn’t sell it because I thought Apple was overvalued or Apple had gone up too much. I sold for a very strange reason. I sold because I’m very uncomfortable with the other people who are holding Apple shares right now. The new investors of Apple scare me. They’re momentum investors. They’ve shifted the game.”

A patrician stockpicker, Damodaran does not like the plebs biting into Apple. He has sold out for reasons similar to Rockefeller’s - though the latter sold his entire portfolio after seeing the kind of investors getting into the market.

Damodaran headed for the exits because he believes that the hoi polloi who have entered Apple may want different things from the management - more dividends or stock splits - which ultimately may be value depletive.

Damodaran is a value investor who does not believe in riding the momentum - which depends on the arrival of the “bigger fool” to drive up stock prices.

The current Apple mania, which saw the stock cross $644 in price last week and took the company’s market capitalisation briefly beyond $600 billion (exceeding the combined values of both Microsoft and IBM by a clear $ 100 billion) shows that the stock is now entering bubble territory.

It may not be anything close to the 17th century Dutch Tulip Mania or the 18th century South Sea Bubble, or even the Dotcom Bubble that burst around the turn of the 20th century, but when analysts talk of valuing Apple at $1,000 a share, which will take it close to $1 trillion (about half of India’s current GDP), we are clearly getting into a danger zone. (For more on bubbles, read this)

The analyst who predicted Apple would hit $1,001 a share is Brian White of Topeka Capital Markets, who says that the launch of the iPhone5 later this year will be a cracker of an event that could take shares past this milestone.

After a recent visit to China and Taiwan, he wrote: “The buzz around the new iPhone5 is growing in Asia and speculation around the timing of the launch has begun.” He expects the new phone to be “sleek”, with 4G wireless and a four-inch screen that could debut by the end of 2012, and this would bring Apple shares close to his target price. That’s when Apple could become a $1 trillion company.

Sure, this could happen. But the world is not standing still. Samsung, for one, is getting ready for the big battle with Apple, and has already begun edging out players like Nokia and Sony out of many markets - not to speak of players like BlackBerry, whose days seem to be numbered. Many Taiwanese brands are also chipping away at the market. In future markets like India, Apple is far behind Samsung in terms of marketing strategy and pricing.

But it is one thing to be a great company with shiny new products, quite another to be valued beyond your real worth. It is worth noting that during the dotcom boom, Infosys and Tata Consultancy Services were valued at price-earnings multiples (P/E) of over 100-150. This means, at their then earnings level, anyone buying their shares at the then market price would have had to wait for 100 years of profits to earn back their investment.

To be sure, it is not Damodaran’s case that Apple is overvalued even now. With a P/E of around 17, Apple is even today not valued any higher than Infosys (around 16-17) at current quoted prices on the stock markets. So it is not as if Brian White and other Apple bulls are talking through their hats.

However, let’s hear Damodaran on it a little more closely. According to him, the kind of shareholders you attract can impact the way a company behaves towards them.

He told Bloomberg: “Once stocks become a momentum play, intrinsic value goes out the window.” He believes that Apple’s new dividend policy, intended to appease restive shareholders by distributing a part of its cash hoard of nearly $ 100 billion, could lead to demands for more.

“They (the new shareholders) want a very different thing from Apple than from the rest of the investors in Apple.” In his blog, Damodaran wrote: “If Apple initiates a dividend, the demands for increases in those dividends in future years will come and the company will find itself locked into a dividend policy that it may or may not be able to afford.”

A March report in ABC News seemed to suggest that Steve Jobs would not have recommended too much shareholder wooing. Quoting Bill Simon, co-author of a 2005 Jobs biography titled iCon, the report said: “No, this would not have happened. Obviously the company could have afforded to do this (pay huge dividends) years ago, but it didn’t.”

The ABC report also quoted from Helix Investment Management to note how “Jobs essentially shut down any discussion of capital allocation before it began. His experiences in 1997, with Apple approaching bankruptcy, placed him into that mindset. Under his watch, Apple would keep every penny it earned, investing in the business and occasionally acquiring a company here and there.”

But under the pressure of shareholder expectations, even iconic investors do things that they are not normally inclined to do. Warren Buffett, for example, has long held that he won’t invest in tech stocks or initiate share buybacks. In 2011, when his Berkshire Hathaway share was underperforming, he broke both rules. (Read here) .

So, Damodaran is not wrong to assume that Apple is changing the way it sees investors. Clearly, the new approach is not the same as Jobs'.

Damodaran does not like it. It does not mean Apple’s best days are over. But it is a signal that something fundamental about the company’s approach to shareholders has changed.

Moreover, there is a larger point. The investor obsession with Apple and technology shares ( Facebook, etc) is now approaching hysteria. This is driven partly by what investors see as the future potential of tech shares, and also the general global gloom on the economy - which keeps other share prices suppressed. (Why, for example, should an Exxon Mobil, which is sitting on billions of tonnes of black gold, be valued $200 billion less than a company that makes phones and internet consumption devices?)

Bubble or no bubble, it’s time to get cautious on Apple.