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Much has been written regarding Apple's (NASDAQ:AAPL) valuation, which appears incredibly cheap when you examine the multiples and think about power of Apple's balance sheet.

Here are the multiples based on Wall Street consensus estimates for the next few years.

FY 2012
(Year Ending 9/30/2012)

FY 2013
(Year Ending 9/30/2013)

FY 2014
(Year Ending 9/30/2014)

EPS estimate

$35.15

$39.19

$41.79

PE Ratio

11.9x

10.7x

10.0x

PE Ratio (ex-cash)

9.5x

8.5x

8.0x

Source: Bloomberg

Apple had over $81 billion of cash on its balance sheet as of its September quarter-end. Apple's cash balance will likely top $90 billion when the company reports its December quarter on January 24. By the end of 2012, if there is no change in policy (i.e. no dividend put in place), Apple will have well over $100 billion in cash.

It makes sense to think about Apple's valuation ex-cash. It simply does not need $100 billion of cash to operate its business, and I believe it will return cash to shareholders in 2012 (I will add that I do not think this has anything to do with the passing of Steve Jobs. Even if Steve Jobs remained in charge, a cash balance ballooning to over $100 billion would result in a dividend).

Given Apple's incredible growth trajectory, it should demand a larger multiple. Even a multiple of 12x fiscal 2012 earnings seems too low, but if applied ex-cash it would imply a stock price in excess of $525/share (12 times $35.15 of earnings plus $105 of cash per share). This is a 25% premium to where the stock is trading today.

Further, I believe the Wall Street consensus number is conservative. Wall Street analysts got egg on their face last quarter when iPhone demand was pulled from the September quarter into the December quarter due to the release of the iPhone 4S. While Apple beat its guidance, the company missed the Street's numbers, a rarity for Apple. Wall Street analysts do not like when this happens, especially when their estimates are above the guidance provided by the company. They would rather be conservative and have Apple beat their number. Missing the quarter-to-quarter demand shift from the iPhone 4S launch showed that some analysts had become complacent given Apple's consistent upside performance. They will not repeat their mistake this quarter. Over the last week some analysts have cautiously increased their iPhone 4S unit estimates for the December quarter to 30mm, when in reality Apple could hit 35mm.

Let's examine the growth that is implied by the Wall Street consensus numbers.

FY 2012
(Year Ending 9/30/2012)

FY 2013
(Year Ending 9/30/2013)

FY 2014
(Year Ending 9/30/2014)

EPS estimate

$35.15

$39.19

$41.79

EPS growth

27.0%

11.5%

6.6%

This reveals that analysts are predicting a massive slow down in Apple's growth over the next few years.

Let's examine the potential growth drivers over this time period and see if we agree with their slowdown prediction.

Apple's growth drivers:

Growth Driver

Timing

Comment

iPhone 4S in China

Current / On-going

Last week the crowd at Apple's Beijing store for the iPhone 4S launch was so large that the company cancelled the launch for fear that customers could get trampled. That suggests that the opportunity in China is incredible, especially given that Apple has yet to offer the iPhone to China's largest mobile carrier.

Enterprise Adoption of iPhone and iPad

Current / On-going

A few years ago companies did not support Apple products. That is changing at a rapid pace. Firms are now buying iPads, supporting company email on iPhones, etc. While on the subject, note that Apple has not made enterprise inroads with Macs to any real extent. If that happens, there is an entire new growth leg to the story.

Macbook Air

Current / On-going

Mac sales are going through the roof, which speaks to the strength of the Apple ecosystem and the appeal of the Macbook Air. While the overall PC market softens, Macbooks are growing.

iCloud

Current / On-going

I think people are underestimating the power of the iCloud product to further protect the Apple ecosystem. Once your contacts, music, photos, etc. are in the iCloud the switching costs from Apple to another provider are significant. Further, iCloud will likely continue to improve over time.

iPhone 5

2H 2012

Apple will likely launch a new iPhone with a new form factor that works on LTE networks in 2012.

iPad3

2H 2012

A refreshed iPad will result in a massive upgrade cycle from people still using the original iPad. It will also attract new users, and some iPad2 owners won't be able to help themselves and will upgrade.

iTv

2013

The buzz around an iTV product started with the publication of Steve Jobs' biography and will only increase throughout 2012 as the world waits to see what Apple is going to do with TV.

My conclusion is that analysts are being ultra conservative when it comes to Apple. It may be that they are psychological constrained by Apple's size and cannot bring themselves to think about earnings of $60 per share times a 14 multiple, which implies $840 per share (without adding in cash), and an almost $800 billion market capitalization. Will Apple get there? It's difficult to say, but it's easy to say that at $420 a share with a multiple less than 10x Apple is cheap. It is a value play and a growth play, and I look forward to using Apple products for many years to come.

Disclosure: I am long AAPL.

Source: Apple: Conservative Analyst Estimates Are Missing The Incredible Growth Story