Apple (AAPL) first closed above $400 per share on July 26th ($403.41 to be exact) and traded as low as $353.21 on August 8th as the market traded down. On September 16, Apple regained the $400 level closing at $400.5 before reaching a closing high of $413.45 on September 20th after reaching an intra-day high of $422 per share.
I think that it is instructive to take a look at Apple’s financial valuation when the stock hit $422 per share. It will be no surprise to most investors that it was still very cheap, a fact that sell-side research is beginning to acknowledge (more detail on this below).
At $422 per share, Apple reached a market capitalization of $395.6 billion and, with $76 billion of cash on the balance sheet, an enterprise value of $319.4 billion. On a multiples basis, ex-cash, Apple traded at 12.7x fiscal 2011 earnings and 11.3x fiscal 2012 earnings despite growing earnings growth over the last 6 quarters of 121.9%, 92.2%, 75.2%, 67.5%, 74.6%, and 86.0%, respectively.
Quite simply, multiples at these levels applying to a company with these growth rates does not make sense. If I was presented with these metrics without knowing the company name I would assume something was wrong – perhaps earnings were being manipulated or there was some dynamic that would dramatically reduce growth going forward, or the market thought the company was a fraud. None of these issues, however, apply to Apple. With the iPhone 4S or 5 or both, plus the iCloud, and with the iPad 3 in the on-deck circle and an Apple TV product in-the-hole (more baseball parlance), this company has ample growth going forward. Have you been to a restaurant recently where they bought out an iPad with the menu loaded on it? I have.
Now back to the sell-side analysts. On September 20th, Goldman Sachs reiterated its buy rating on Apple and raised its 12-month price target from $480 to $520. On September 23 it was Barclay’s Capital turn as they increased their price target on Apple to $555 from $515. It would not be surprising to more price target increases as we get closer to earnings, which will be in mid-October.
Yes, the company has a lot of cash sitting on its balance sheet doing nothing and there have been rumors that the company may consider a dividend. There have also been recent rumors that Apple could join the Dow Jones Industrial Average. These are rumors and, given Apple’s growth and valuation, they are not needed to drive the valuation upwards. If either of them occurred, it is just Christmas coming early.
Nothing is a sure thing and Apple is a business that has risks. But in these volatile markets, Apple still has growth and is inexpensive. While some investors might seek shelter in high dividend paying stocks (and this strategy makes perfect sense), I like Apple because if it goes down in sympathy with a market selloff, I can buy more. Ultimately, it has too much growth to stay at these levels for long.
