Wednesday, October 13, 2010

Apple Clears $300.... Still Cheap!

All the news today is about Apple (AAPL) clearing $300. Ok, maybe just the financial news because of the heroic rescue of the trapped Chilean miners. Its amazing though that the financial media still becomes fascinated with these psychological numbers. What does $300 really mean? Does it tell an investor anything about value, market cap, or future gains? No, no, no.

Typically it can be assumed that a stock with a price tag above say $100 and likely $300 has had huge gains in the past and AAPL clearly meets that criteria. More importantly though what is the PE, growth rate, and market cap? Two of the previous three items suggests that AAPL has plenty of growth ahead. The third questions that permise.

First, AAPL only trades at a forward PE of 17 based on average earnings estimates, but when using the more likely high end numbers around $22/share the PE drops to below 14. Historically low for a stock with the growth rates of AAPL. Second, revenue is expected to grow some 30% next year and roughly 20% over the next 5 years. Earnings could grow at much higher levels. PEs don't typically trade below these growth rate numbers suggesting investors are still stuck on a assumed high stock price and not the real valuation. Third, the market cap now places AAPL as the second biggest company in the SP500. When a stock reaches such lofty sizes it becomes very difficult to sustain that growth. Large companies becomes targets for rivals and regulators. So far they have managed to sidestep those issues and they benefit from relatively low market share in huge markets. They aren't the dominate player in personal computers or wireless handsets so they haven't ran into saturation issues.

Keep an eye out for when AAPL its the size wall, but until then the stock remains incredibly cheap for their growth rate. The market correctly understands that being a large company that growth can't be sustained for every, but for now AAPL will continue generating huge cash flow reminding us of another benefit to buying the stock. A huge horde of cash and strong cash flow greatly reduces the enterprise value of the company.

Ignore the stock price and pay attention to the value. AAPL remains cheap at $300+.

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