How long can Apple (AAPL) keep this going?

By: ispeculatornew
Date posted: 03.08.2011 (5:00 am) | Write a Comment  (5 Comments)

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When things seems too good to be true they usually are right? That is what I tell myself every single time I consider trading on Apple (AAPL) which has been on a streak like few others in the past few decades. The company that had to ask Steve Jobs to come back to turn things around has never looked back and remains to this day the type of investment that each one of us hopes to find once in our life.

How good do things “seem”?

Apple’s stock has been rising for years and it remains as unanimous as a stock can be on Wall Street. In fact, among the more than 50 research firms that cover Apple, not a single one considers the stock is too expensive and should be sold. And your average 1 year old could probably count the number of analysts that have a “hold” or “average” rating. All the others? They all consider Apple a strong buy and an opportunity to make a good return over the next 12-24 months. That is not necessarily something I love to see. Conventional wisdom has been pretty much one sided on this subject. If everyone likes an investment, it is usually time to get out. As if all of this wasn’t enough, Apple was just named the most admired company in the world.

What has been fueling the growth?

The most positive thing for Apple investors is that the growth in the stock has been more than justified by the surge in both sales and profits as Apple’s devices continue to be the “hot items” all around the world in electronics. Year after year, Apple has successfully launched new products and upgrades of its existing ones. Just look at the Ipad which has been a success beyond probably every single Apple employee & shareholder and it has only been on the market one year.

Is the stock still cheap?

Today, I decided to do an analysis of the stock, its pros and cons in order to see if I am still a convinced “buyer” of Apple stock. For comparison’s sake, I decided to put Research in Motion’s (RIMM) numbers for comparison’s sake. While Google’s Android powers Apple’s most serious competitor, the nature of Google’s business is so different that comparing numbers is kind of pointless. Obviously, RIMM is not anywhere near Apple’s momentum but since I still consider long & short trades as one of the best ways to profit from pricing discrepancies, I still think that looking at both companies is a good way to determine Apple’s value compared to its current stock price. To be sure, I have generally been on the long side in Apple trades and have had success closing another one of those trades last month and restarting one days later.

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P/E ratio seems very reasonable

When I look at both companies, obviously Apple’s P/E is higher which makes sense given the overall growth which has been stronger over several years now and while Research in Motion (RIMM) has decent growth (which is so easy to forget), Apple’s 50%+ sales growth more than justifies its current 20 P/E ratio. If current projections hold, it’s P/E with next year’s numbers would be 13 which seems cheap in my opinion.

So it is all about growth…

It becomes easy to see that the only way the current valuation makes any type of sense is if Apple can keep up very strong growth for several years. If that is the case, I don’t have any doubt that Apple is in a strong position:

-Its Iphone is a dominant player and the recent addition of Verizon as a carrier was a necessary step to keep its dominant position in the US markets. I do expect the price of the Iphone to diminish over time thanks to other revenues. As well, the upcoming launch of the Iphone 5 is sure to bring many more customers.

-Apple announced it had now reached over $3 billion in revenues through the App store and that is sure to increase thanks to the most recent changes concerning subscriptions and in app payments.

-I had quoted an interesting post about the new media, and how content is being distributed, and to me, Apple is the perfect example of a company that is well positioned thanks to its Apple world.

-The Ipad became in a matter of months the dominant player in the tablet market which is exploding. It’s unclear how things will play out but competitors so far have been coming up with inferior products at often more expensive prices making it likely that the Ipad will remain the dominant player.

Downside risks

As in any business, there is risk and in this case, the major risks are around Apple’s product and its sales momentum, here are the main ones that I see as an Apple shareholder:

Steve Jobs: No doubt, as nice as it was to see Steve Jobs able to attend the recent Ipad launch, it underscored once more how dependent the company is on Jobs. He is the top guy in tech these days and perhaps the best leader of any company in the world but having that guy comes at an expense. If Jobs were to leave, it would greatly diminish Apple’s innovation in the long term and would no doubt get shareholders very worried. Jobs, who is on sick leave right now seems to be doing ok but there is certainly a lack of news and depending on one individual’s health is not the best feeling in the world.

Decent competition: While no competitor has been able to compete with the Ipod, the Iphone is under a more serious threat from Google’s Android and depending on how that plays out, it could affect the perception of Apple’s superiority. What happens if at some point the Iphone is not “The” phone to own? It could happen and would have long term impacts.

Lack of innovation: One of the big worries behind Steve Jobs’ health issues is the fact that he seems to be the guy that comes up with the big ideas or at least the guy able to filter the good ones and get them done. After the Ipod, came the Iphone followed by the Ipad. What is next? Apple’s stock supposes to a point that something will follow and while some speculate that an Apple TV will be the next big thing, it’s unclear and always possible that there will not be a big hit.

Major miss: Loyal Apple fans are ready to buy just about anything that is produced by Apple and that comes with amazing sales. But it also comes with a risk as one product miss could have a major impact on the perceived “perfection” of Apple.

Overall

I remain as convinced as ever that Apple is a terrific buy right now while I am already long, I would not hesitate to take a more important position. It is one of those few cases where every analyst seems to have it right.

Disclosure: Long Apple

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5 Comments

  1. Comment by Neil — March 8, 2011 @ 6:25 pm

    That’s very weird that you wrote this article cause I wrote a similar one last week.

    http://wp.me/sYuzq-apple

    Please let me know what you think.

    I still am an Apple stock fan but just had some questions.

  2. Comment by Open source portfolio — March 8, 2011 @ 8:50 pm

    I think a lot of people will soon be turning on apple. I know I did. I’d never buy another product done by that company until they change their ways

  3. Comment by IS — March 9, 2011 @ 5:22 am

    @Neil – Yes good post, agree with the concerns but overall I’m very much a buyer of Apple

    @Open Source Portfolio – what ways exactly?

  4. Comment by Stephen — March 19, 2011 @ 10:18 am

    Apple’s been taking a beating the last few days, time to sell?

  5. Comment by IS — March 21, 2011 @ 8:26 pm

    @Stephen – Not quite I think..stock had a good day today, +2,6%!

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