Jul 20, 2011


Anyone following the markets is probably aware of the earnings report last night from Apple. If you take all of the fanboyism away from the discussion it is hard to view the rise/fall/rise of this company as anything other than phenomenal.

Here's their decade long stock chart. 10 years ago the stock was at $10. It is now at close to $400.

You'll notice a small blip at the beginning of 2006 as the company retreated in price. When I was an analyst we successfully shorted the stock for about a 30% gain before closing the position.  Pure unadulterated luck.  It could have been very ugly.

It has built 3 additional multi-billion dollar businesses (iPod, iPhone, and iPad) in addition to its growing Mac computer business in that 10 years. In fact the iPhone and iPad are slowly eclipsing the two smaller categories. It's remarkable that iPad is larger than Macs yet it has only been around for a little over a year.

In market cap it only trails Exxon-Mobil in size (AAPL $360B, XO $410B). It seems bizarre that those two are even in the same range of market caps.

But here's the thing. Is it expensive?

Let's look at Price over Earnings (P/E). PE = 18.4. "E" here is trailing earnings. The money made in the last 4 quarters. That's high but not egregious. Especially for a company that is growing revenues 80% and earnings 120% last quarter (year over year comparison). In fact that's kind of cheap.

If you look at forward estimates of E (the analyst's estimates on the Street) it's downright cheap. Forward E stands at $29.15 so PE (forward) is 13.3. That's damn near fair value IF it completely stopped growing next year. And considering analyst estimates are typically very low (almost by design) the printed PE next year will probably be even lower with no change in price.

So how would you justify such a low price. Clearly something has to happen either to sales or to margin. Both would affect the bottom line earnings. But what would that be?

Macs still continue to grow faster than the market and their margins have been fairly stable over time. It's hard to believe any competitor is going to come along and drastically change this in the next year or two.

iPod sales are stable to dying and margins I imagine are quite high so there's some money to be lost there. But they are now a small part of the overall business. And in reality these are just iPhone Light and a gateway drug to iPhones. My kids are unaware that there is another phone besides the iPhone.

iPads are still set to grow. There are lots of competitors, notably Android based devices. But it's hard to imagine that iPad sales won't continue to grow in such a nascent market. Most of the iPad competitors suffer from awful branding, marketing, and sex appeal. That will probably change but not in a way that will crimp continued astronomic growth.

iPhone is the only place I could get seriously convinced something bad might happen to Apple's stock price. But even there it's hard to believe anything terrible could happen. Android here is a real competitor, growing faster and taking share from Apple. Sales growth rates seems to be slowing from the chart above but that has more to do with the annual release cycle typical for Apple's phones. Could sales plateau? Possibly. Could margins get crimped? Unlikely. Both Apple and Android are just stealing the thunder from the incumbents like Nokia who have ruled the phone space for ages. Apple is still a relatively tiny player in the market, selling 20 million units last quarter when over a billion are sold each year worldwide. And that can only get larger.

So what's the argument for Apple being expensive?

The only one I can really think of is the Job's factor. If he dies or leaves the company in any capacity. Other than that it's tough to get too worried about holding AAPL.

1 comment:

Anonymous said...

My thought for it being expensive is pretty straight forward - anything that can be built that quickly can be built that quickly by someone else. There's a very small barrier to entry - will there be billions to be made this completely new market? Absolutely. I just think the market is pricing it like Apple is the only one who can do it - and I just don't think that's the case.