Why Apple (AAPL) Is Still a Bargain Despite Its Lofty Price
AAPL's Astounding Price Gain
Is Apple (AAPL) still a bargain despite its lofty price? An argument based on earnings growth and valuation could be made to support the contention that AAPL is still a bargain.
Since the 2003 market lows, Apple, Inc.’s stock (AAPL) has made one of the largest gains of any stock on a major U.S. stock exchange. Apple’s stock went from about $7 per share to a pre-split $625 per share peak; a gain of 8,828%. Such an astounding gain is enough to make many investors think twice about holding or buying Apple’s stock. After all, how much more can a stock that has gained 8,828% in less than a decade go up? The answer to this question is how to value Apple’s stock and the future growth for Apple’s earnings.
Apple Is a Buy After The 7 for 1 Stock Split
Apple’s valuation after the 7 for 1 stock split is a lofty $568 billion. AAPL is fairly valued, with a Price Earnings ratio (PE ratio) of 15 after the stock split, which put the stock in a $92 to $94 per share trading range. If AAPL stayed at $92 to $94 per share, projected 2015 earnings would bring the PE ratio down to 13.5.
There are reasons to believe that Apple is a buy after the 7 for 1 stock split. Individual investors that love Apple's products may bid up AAPL to $100 per share or more now that it is at a price that is more accessible to them. If AAPL acts like other stocks that have undergone a forward stock split, it may be expected to gain 25% within one year of the split. Beyond the stock split dynamics, the iPhone 6 product launch is expected in September 2014, which could cause a surge of buying of AAPL stock, if the launch is successful. Given these positive forces, it is likely that AAPL will reach $100 per share by September 2014.
Why Apple (AAPL) Is Still a Bargain Despite Its Lofty Price
Apple passed Microsoft to become the largest technology company by market capitalization, and now has a market capitalization of more than $500 Billion, which is more than hundreds of Billions larger than Microsoft’s market capitalization. Apple’s market capitalization has grown so much that it is now is vying for the highest market capitalization of any company in the world, taking first place for a time during 2012, only to relinquish it back to Exxon-Mobil. However, even with its lofty market capitalization, by standard stock market valuation measures, Apple’s stock is still relatively inexpensive.
Apple’s current stock price to earnings (P/E) multiple is approximately 11, which is relatively cheap for a high technology company. This is due to many valuation factors, including: expected earnings growth, current P/E, historical P/E averages for the technology sector, and cash on hand.
During a period of economic expansion, established growth stocks such as Apple typical have forward P/E multiples of between 20 and 50-times projected earnings. A 20-times P/E multiple would put Apple’s stock as high as $900 in 2013. A 50-times P/E multiple would put Apple’s stock as high as $2,250 in 2013. A 50 P/E multiple is unlikely for a mature company like Apple, despite its high growth rate. However, if Apple meets its 2013 earnings estimates, it is not unreasonable to assume the stock will trade between $600 and $900 per share in 2013.
Apple’s cash holdings of $138 Billion make its stock appear even cheaper, since the cash could be added to Apple's valuation. In March 2012, Apple management announced that they would start paying a quarterly dividend of $2.65 per share. This dividend may attract a new breed of Apple investors, such as mutual funds, institutions, and investors that invest in dividend paying stocks. Even with this sizable dividend, analysts believe Apple's cash position will continue to grow, as it has grown for many quarters. Apple is a virtual cash generating machine.
Books About Apple's Late Steve Jobs
What Could Derail Apple?
Of course, as with all stocks, Apple does have some risks associated with it, which could put a dent in Apple’s earnings and its corresponding stock price. The primary risk is that with their founder and leading visionary force, Steve Jobs, now deceased, Apple may lose its visionary and technological edge. When Steve Jobs was forced out of Apple in 1985, the company floundered, losing money as they attempted in vain to develop new products. The question this time around is whether Apple is now ready to continue to innovate and grow earnings without Steve Jobs? Another large risk that Apple faces is the overall state of the global economy. Much of Apple’s growth is now outside of the United States, so even if the United States is experiencing economic growth, Apple needs economies in Asia and other parts of the world to grow, in order to meet earnings expectations.
Other risks that Apple faces are from competitors such as Samsung, who have wowed the technology world with their suite of smart phone and Mobile computing devices, sold under Galaxy brand. While Samsung has been able to undercut Apple on price points, they only earn a fraction of what Apple earns from its sales of smart phones and mobile computing devices, and Apple's reputation for quality and excellent customer service appear to be helping Apple in their battles with competitors.
Apple also needs to figure out a way to enter the two fastest largest developing world economies in the world, China and India. While Apple's products are revered in China and India, most people in these two emerging economic giants cannot afford Apple's products, which do not enjoy the same subsidies from mobile phone carriers as they do in developed world countries. There are rumours that Apple is working on a scaled down cheaper version of the iPhone to sell in markets such as China and India. There are also rumors of an iWatch, for wearable computing, which could also be released at a price point that would generate demand in China and India.
Risk factors aside, Apple’s stock AAPL appears to be undervalued based on expected 2013 earnings, even as it trades near $500 per share. Is AAPL still a bargain despite its lofty price? Only time will tell. If Apple continues its growth trajectory, AAPL may be the first stock to reach a market capitalization of $1 Trillion. It is on its way to being the first trillion dollar company. With the Apple Watch and Apple Pay coming on line, the trillion dollar market capitalization threshold appears within reach.
Adequate due diligence should be performed before any investment decisions are made. For disclosure purposes, I currently hold no position in AAPL.
Disclaimer: This article was not written by a financial professional or a registered financial advisor. This article is for informational purposes only, and is not intended to be solicitation or recommendation to purchase securities mentioned herein. Please consult a registered financial advisor to ensure you understand the risks and rewards associated with buying and selling stocksand other financial products.
Classic Apple Multi-Color Logo
Apple's Future Polll
Greg from New York on February 21, 2014:
Great call in April. Still a value today, imo.
monicamelendez from Salt Lake City on July 26, 2012:
Apple products are incredible and they will keep coming up with more of them.
Share tips on June 28, 2011:
I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I?ll love to read your next post too.
John Coviello (author) from New Jersey on May 26, 2011:
I cannot recommend buying any stock since I am not a licensed financial advisor. I laid out the case why I believe Apple is still undervalued at its current price. Please do further due diligence on Apple and consult a financial advisor regarding whether they recommend buying Apple.
Of course there are always risks in buying any stock, and Apple is not immune to these risks. If the economy goes into recession or if Steve Jobs leaves permanently or if Apple hints at a slowdown in sales growth, the stock price could tumble.
MarloByDesign from United States on May 26, 2011:
Do you recommend buying this stock now? Thanks for writing this Hub!
KSunk on May 17, 2011:
Apple will earn more than $27 in 2011. In 2012, it will probably be around $40 per share. Now calculate the fair market value of APPL based on those more realistic estimates.
myi4u from United Kingdom on May 16, 2011:
Honestly mysunsuion, Apple products are not expensive. The price is about right for the quality of the product that you are getting. If you try to look for other brands with similar quality of Apple, you will find that they are even more expensive than Apple's.
chamilj from Sri Lanka on May 15, 2011:
Of course Apple is good stock to buy.
mysunsuion on May 14, 2011:
But, Apple products are expensive...