Apple Inc, Gilead and Alphabet Inc: Can Analysts Predict Two Years Into The Future?

Apple Inc. shares currently trade at a trailing price earnings ratio of 14. Currently, analysts believe Apple will earn more than $10 per share  next year and achieve a forward PE ration of only 11.6. They argue that Apple seems like a very cheap investment based on this low multiple and its huge net cash position. Can we really trust analysts’ estimates? Are they really skilled at predicting what will happen in 10, 5, or even 2 years into the future?

Analysts keep predicting about companies almost daily. In a huge influx of news and updates, these predictions usually get buried over time. In this article we have decided to throw back to 2014 and see how the predictions made by notable analysts and investors about Apple Inc. (NASDAQ:AAPL), Gilead Sciences, Inc.(NASDAQ:GILD) and Alphabet Inc (NASDAQ:GOOGL) turned out down the road.  

Apple Or Russia?

On December 22, 2014, Paul Gambles, managing partner at the financial advisory group MBMG Group, said in an interview to CNBC that he’d prefer buying Russia than owning Apple Inc. (NASDAQ:AAPL)’s shares after the Russian economy crashed amid sanctions put on the country following its aggression in the Eastern Ukraine. Gambles had called investing in the Moscow stock index a “high risk opportunity”, citing valuations of Apple Inc. (NASDAQ:AAPL) and Russia’s equities.

The context of this speculation is interesting. In November that year, Bloomberg’s Srinivasan Sivabalan had published a report which said that if an investor had owned Apple’s stock, they could have sold it and bought the entire Russian stock market, still having enough money to buy an iPhone 6 Plus for the entire Russian population (143.5 million). The Kremlin’s political conflicts, sanctions and economic stagnation had resulted in Russian equities plummeting by $234 billion to $531 billion in 2014, while Apple Inc. (NASDAQ:AAPL)’s value had skyrocketed by $147 billion to $652 billion in the same period.

It seems the investor would have lost a fortune had he invested in Russia in 2014, because the world’s largest country is still suffering from a crippling financial crisis, with no end in sight. Russia has been operating at a deficit since 2012, while its Federal Reserve will go dry 2017. The country still depends upon oil, gas and raw material exports for a major chunk of revenue. As of 2015, oil and gas accounted for a whopping 43% of the government’s revenue.

However, the election of Donald Trump and oil prices finally going above $50 a barrel gave the Russian economy a much needed respite recently. The Moscow Exchange has gained about 12% since the US election, while S&P 500 is up 5.9% in the same period. VanEck Vectors Russia ETF has grown by 33% to $2.5 billion since November 29, while the iShares MSCI Russia ETF assets are up by 16% to $438 million. Russia’s RTS Index was down by over 48% since the start of 2014 till the date of the interview, while the index is down just by 0.70% year-to-date in 2016. An upcoming Pro Russian team in the White House, especially Donald Trump’s selection of Rex Tillerson, who was awarded the Order of Friendship in 2013 by Vladimir Putin, for the position of Secretary of State, signals a welcoming future for Russia, and analysts think that there is a chance that the new US government will ease up sanctions on the country. If the Don lifts sanctions from Russia and oil continues to rally, Gambles’ speculation might prove correct.

Apple Inc. (NASDAQ:AAPL) continues to be the juggernaut in the tech world, but there are signs the company is losing steam, mainly from its primary product, iPhone. In April the company posted its first ever sales and profit drop in a decade. Apple’s manufacturers in China and Taiwan said they received less orders from the company, due to the market saturation and lack of new features to come up to the users’ expectations. Earlier this month, a Taiwan-based manufacturer of Apple told Digitimes that the Apple slashed its orders for iPhone 7. Apple’s stock was trading around $113 a share on December 22, 2014, while its current price is $116.29.

Was Brian Skorney Right about Gilead Sciences, Inc.(NASDAQ:GILD)

Back in 2014, Express Scripts Holding Company (NASDAQ:ESRX), the largest pharmacy benefit manager in the US announced that it will no longer cover Gilead Sciences, Inc. (NASDAQ:GILD)’s hepatitis C drug Harvoni, and prefer a more cheaper drug made by AbbVie Inc (NYSE:ABBV) called ‘Viekira’. Discussing this announcement in a program on CNBC, Baird’s senior biotechnology research analyst Brian Skorney had advised investors to assume a “wait and see” mode as he thought the news would not dent the market share for Gilead Sciences, Inc. (NASDAQ:GILD).

Selling GILD shares would have been better than waiting and holding the bag over the long-term. At the time of the interview, Gilead’s stock was trading at $96, and today its price is $73. Earlier this year, Merck & Co., Inc. (NYSE:MRK) launched its Hepatitis C drug which is 32% cheaper than that of Gilead. Last week, a US jury ordered Gilead Sciences, Inc. (NASDAQ:GILD) to pay Merck (MERCK.CO-INC) $2.54 billion in royalties in a patent lawsuit case regarding drugs hepatitis Sovaldi and Harvoni. The jury said that a patent acquired by Merck in 2014 on hepatitis C treatments was valid. Gilead’s hepatitis C drugs have proved a 90% success rate in curing the disease, but the company has been under fire for hiking the price of its drug. Gilead is reported to have made $20 billion with Sovaldi and Harvoni drugs in 2015.

However, if we take into account only short-term future and context of the interview, Brian Skorneythe was dead right, as the stock skyrocketed to as much as 121.89 in 2015, before starting to slip in 2016.

Eric Jackson’s Prediction about Google’s Mobile Ads 

Eric Jackson, founder and managing partner of Ironfire Capital, had predicted that Alphabet Inc (NASDAQ:GOOGL) was set to face difficulties in mobile ads business, as the hedge fund manager thought the company was not ready for a smooth transition from the conventional model to the mobile-first paradigm. Jackson had liked Facebook’s handling of the mobile ads. Google, however, remains the leader in the mobile ads industry.

In 2015, the company took away a whopping 64% of the total revenue from the overall online ads sector ($30 billion), while Facebook’s share was just $8 billion, according to Pivotal Research analyst Brian Wieser. In an earnings call in April, Google’s CEO Sunder Pichai said that Google was ready to revamp its mobile ads business around video, targeted ads based on user data and app install ads. Alphabet Inc (NASDAQ:GOOGL) recently said its faster mobile ads are boosting click-through rates by 200%. In the second quarter of 2016, Google’s total revenue totaled to $21.5 billion, out of which nearly $19.1 billion came from online ads business. By 2018, about 60% of Alphabet Inc (NASDAQ:GOOGL)’s ads revenue will come from mobile ads, according to eMarketer.

Disclosure: None