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Saturday, October 15, 2011

AAPL valuation

Now that AAPL is pushing past 420, and about to release their numbers on Tuesday, I have been thinking about how to perceive Apple's stock to obtain a realistic expected valuation.

My points of consideration:

1. Already the largest investor base. (Everyone owns it.)
2. Product growth trends
3. Revenue and earnings growth rates
4. Potential product growth drivers
5. The market has never seen a situation like AAPL

Earlier this year the majority of the hedgie big-boys developed a "too big" mantra on AAPL. Despite consistently proving other wise, some heavy hitting big-boys question its growth prospect. However, AAPL is in a situation where the average investor and technophiles have not given up on it.  The dichotomy has allowed AAPL to trade at very low multiples, then rally when it proves itself. (As the big boys catch up to the bloggers and technophiles.)

Its product cycles are still in their growth phase, and eps is still accelerating. (As for future products, just combine a giant iPad, iTunes library and Siri and you have the future living room.)

When Steve Jobs resigned, the stock pushed toward mid 350 briefly, then rallied.  Then, while everyone was disenchanted by the iPhone 4S release, the stock again pushed toward 350.  The mid 350 level, factoring out the previous quarter's cash, gave AAPL a trailing multiple of 11.

This multiple was given to AAPL while the SP500 was in a state of absolute free fall negativity.  The intra-day low end of the SP500 was near 1075, giving the SP500 a multiple of 11-12.

The SP500 and AAPL have since bounced.  The market is now trading in a more reasonable 12-13 multiple range.  AAPL is now trading with a multiple (backing out the cash) of mid 13.

My point here is that AAPL may have gotten so big, over owned and lack of cash utilization, that the street will only give it a market multiple when backing out its cash, regardless of growth rates.

So when the SP500 trades with a multiple of 14, so will AAPL.

At the moment, this is not a bad thing.  If we factor in 'about to be released' quarter's results, and the SP500 is trading with a 13 multiple, that means AAPL will trade at 450 soon after they report.

The 450 target assumes analyst estimates are achieved, which AAPL usually blows past, and $10B in cash is put onto the balance sheet.

This is just another reason I would not sell AAPL going into earnings. And if by some freaky development the street decides to sell the stock after it reports earnings, I would be an aggressive buyer.

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