With Apple having shot up almost 75% since late November (from $363.57 to $633.68), the obvious question is whether the ship has sailed from an 'Apple as a Stock Investment' perspective.
My take on this one is that the so-called market professionals (analysts, media, insitutional investors) tend to bucket stocks by category, so that a company like Apple (18.03 trailing PE) is wrongly bucketed in the Dell ($DELL) and Microsoft ($MSFT) personal computers category, when in truth, the company is more of a "gold standard" type of investment for those looking to large cap and growth.
In other words, it combines bragging rights ("yeah, I own Apple stock"), buy and hold (it's a seminal stock to give to your kids) and of course, delivers earnings growth consistency (style AND substance).
This puts it in the category of the brands that everyone loves most, the companies that are most respected and the stocks that no one will ever lose their job for purchasing.
So what are those stocks worth in terms of trailing price-to-earnings (P/E)?
- Google (21.25 trailing PE)
- Amazon (141.89 trailing PE)
- Berkshire Hathaway (19.52 trailing PE)
- Coca Cola (19.91 trailing PE)
- Southwest Airlines (36.13 trailing PE)
- Procter & Gamble (19.79 trailing PE)
- McDonald's (18.71 trailing PE)
- Disney (16.36 trailing PE)
- Nike (23.03 trailing PE)
Now, when I average these out, it comes to a wacky 35.18 trailing PE, impacted by how crazy Amazon's stock is. When I back out Amazon, I get a 21.84 PE.
If I apply this PE to Apple's current price, I get a $767.59 target price.
Meanwhile, the following variables lead me to conclude that Apple getting to that price point is NOT unlikely.
One, is the simple fact that the company is still growing iPhone very well (all of the field data suggests that it's simply dominant in the US and abroad), and iPad will continue to double in the year ahead.
Two is that in both of these categories there are no competitors that are taking market share owing to perceived lack of differentiation, which means I don't see any obvious margin pressure.
Three is that the 'halo effect' for Apple is only accelerating. Their iCloud piece is increasing the rate by which families will standardize on all things Apple, which just means that the per household spend on Apple will continue to grow.
Four is that the Mac is continuing to grow for the simple reason that every PC company is leaving the business, and the core functions of a PC are so commoditized that it actually favors a great PC maker with a focused, fairly priced solution, and that's Apple.
Five is that election years are historically good stock market environments, so that favors a positive macro market in the month's ahead.
In any event, your mileage may vary, but the simple math suggests another ~21% of upside, based upon nothing more than what we already know about Apple's business and the market at large.
But, as you know, Apple is not one to rest on its laurels in terms of new product innovation and earnings acceleration.
UPDATE 1: With Apple down to $530.12, owing fully to a skittish market, this topic is worth re-visiting. Andy Zaky of Bullish Cross (he's the #1 $AAPL analyst in my book) did just that, instituting only his 5th BUY rating ever on Apple, adding that the company is trading at a near 8-yr low P/E ratio. He projects that the stock will hit $750 by end of January.
UPDATE 2: I wrote this piece originally on April 5, so you may be inclined to say that the market has corrected, and therefore Apple's value should correct accordingly. Would it surprise you to know then, that even after the corrections (the averaged P/E for the comparison companies, net of Amazon, is NOW 19.19), Apple's implied value based upon the same logic is $788.
UPDATE 3: Jean-Louis Gassée has written an excellent piece that attempts to decode share pricing logic, and the wide disparity between Apple and Amazon. I would add another point of consideration to this equation. Namely, that no good deed goes unpunished. In other words, for all of the bashing about Apple’s walled garden mentality, it is refreshingly transparent with investors on things like unit counts, product and geo segment breakdowns, margins, virtual channel metrics (iTunes/App Store) and real channel metrics (Apple Store), to name a few. Put simply, this is a company that wants to be understood AND pays the price for it.By contrast, Amazon’s metrics are all about not wanting to be understood, and they are awarded deeply for it.I suspect this is in part because we have all been trained that the naysayers in phase one of Amazon’s life as a public company were left embarrassed, and fear of humiliation when you know that the guy on the other side of the table is smarter than you is a potent force.
UPDATE 4: As of February 23, 2015, Apple is now trading at $929 per share pre-split. Not only have they not cratered, they added a dividend, captured 95% of the profits in the entire mobile phone handset industry, cracked the code on China, and successfully made the transition from Steve Jobs to Tim Cook. The next big test is Apple Watch.
Related Posts:
- It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
- Apple just became IBM of the Post-PC Era: Thoughts on Apple’s 'Q3 Earnings Call
- Apple's Segmentation Strategy (and the Folly of Conventional Wisdom)
- Five reasons iOS vs Android isn't Mac vs Windows
- Holy Shit! Apple's Halo Effect
