During the Tech bubble, investors effortlessly piled into Technology and dot com stocks. People understood that Technology and in particular, the internet, were going to change the way we live. Can you even imagine what life was like before the internet? If you work in an office try and imagine your work station without a computer. Just because the internet was going to change the way we live (and it has), that doesn't mean technology stocks were worth 200 times earnings. The corner pet store with a website is still the corner pet store and it's not worth 3 billion dollars. Right now, Apple (AAPL) really is helping to change the way we live and the company isn't even expensive.
Looking at Apple today, the stock is about $310, or $320 a share. There's about $45 a share in cash. So you're paying about $265 for the business. I think they're going to earn well over $20 a share in the next year, so you're looking at a P/E net of cash in the low teens, which is below a market multiple.
- David Einhorn
In 1999, Mr. Market gave Pets.com a 200/1 multiple (just because they sold dog food online) and Apple is currently the consumer electronics company, and Mr. Market gives them a low teens P/E. Do you value them a little bit differently? Why shouldn't they be looked at differently - how many other companies have tens of billions of dollars of cash just sitting there?
So what about Apple earning over $20 per share in 2011? Apple has beat consensus EPS every quarter for the last 4 years. They are a perfect 16/16.
07' Q1: 45.4% beat
07' Q2: 35.9% beat
07' Q3: 27.1% beat
07' Q4: 17.9% beat
08' Q1: 8.8% beat
08' Q2: 8.1% beat
08' Q3: 10.4% beat
08' Q4: 13.3% beat
09' Q1: 28.2% beat
09' Q2: 22% beat
09' Q3: 15.1% beat
09' Q4: 27.8% beat
10' Q1: 76% beat
10' Q2: 36.1% beat
10' Q3: 12.7% beat
10: Q4:13.6% beat
The analyst consensus is $19.13 for 2011. Say they beat by 20%, that's nearly 23 dollars of earnings per share. Over the last 5 years, Apple has had a high P/E of 53.7x earnings, a low P/E of 15.9x earnings and an average P/E of 32.7x earnings. When you get to be as big as Apple, it become incrementally more difficult to grow and expand. It is unrealistic to believe the market would slap a 53.7 P/E on the stock ($1,219 per share), but is a 20 or 25 P/E reasonable? That would put Apple at $460 to $575 per share. It is difficult to grow earnings when you are dealing with such large numbers, but it's not impossible. Apple did launch another home run product this year that should give them a multi-year boost. Apple is also doing fantastic in Asia, as in Q2 they reported 474% i-phone growth in Asia, including 900% in greater China. Remember when Americans all had Sony (SNE) electronics from Japan? How about Asians with American electronics? Apple does make over 50% of their profits from outside America, so keeping tabs on them overseas is important.
One of the big drivers for Apple is moving from a computer company to a phone company. People replace their computer on average every 7 years, whereas they replace their phone on average every 18 months. This gives Apple the opportunity to run a more razor and blades business model. One of the most beautiful parts of selling smart phones is that consumers aren't feeling the true cost of the iPhone. The carrier usually subsidizes the purchase of the phone in return for the customer signing a multi-year service contract. Smart phones are the way the wireless market is going and Apple is the early leader. In a few years everybody is going to have a smart phone and many of us will have iPhones. One of the big obstacles holding Apple back is being chained to AT&T (T). Once Verizon (VZ) offers the iphone (which should happen in 2011), look for Apple earnings to get another boost. How many people like Verizon's service but want a cool iphone? I'm one of those people.
A good artist copies, a great artist steals.
- Pablo Picasso
Apple didn't invent the MP3 player, but you'd think they did with the way they popularized the iPod. Apple didn't invent the smart phone, but they made it their own with the iPhone. Apple didn't even invent the tablet, but people think they did with the iPad. Steve Jobs saw potential in existing products and made them his own. With a focus on the consumer and fantastic marketing, he's able to give people what they want and lead the market.
When you invest in Apple you are investing in the "Jockey", and not the "horse". Investing in the "Jockey" is not my preferred style of ownership, but you could argue that no technology company maintains a "moat" in Buffett's sense. Technology by its very nature is dynamic and in my mind, speculative. According to Ben Graham's standards, Apple is speculative, but that doesn't mean you can't make money off of it. The stock has gone up a lot, but the company's earnings and outlook have improved a lot. I believe Apple is poised to shine in 2011, and it's still a worthwhile speculation.