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Almost 20% upside may appear to be a significant return, given the volatile state of the stock market. So let's delve into the fundamentals and technicals of Apple (NASDAQ:AAPL). Apple is currently trading at $526. I believe this stock will hit $600 within a year. Here's why:

A day in the life of Apple stock. Look at that volatility!

The technicals

Technicals are essentially indicators that are used to quantitatively assess the value of a stock.

The Price to Earnings Ratio (P/E Ratio)

Apple is cheap

The P/E Ratio is the closing price of the stock divided by the earnings per share, in one year. It is a basis used to gauge the relative valuation of a company. A P/E Ratio of 20 or less is considered favorable. Apple has a P/E ratio of approximately 15 which is good. So even though Apple stock may appear to have reached nosebleed levels, considering its recent rally, the stock is relatively cheap when looking at the company's earnings.

Apple stock is the cheapest it's been in years

Remember, the value of the stock isn't merely determined by the stock price, it's determined by the stock price relative to the earnings. So a good way to analyze whether the stock price is cheap compared to history, is to compare the P/E ratios over time. Please note the P/E ratios were calculated over the last week.

  • The current P/E Ratio is 14.16
  • The P/E Ratio 5-year ave is 22.2
  • 1-year Trailing P/E is 17.6
  • 1-year Forward P/E is 11.6

Comparing the current P/E to the 5-year average, Apple stock is essentially 36.5% cheaper. The Forward P/E Ratio indicates that relative valuation of Apple will further improve over the next year.

Apple is cheaper than other big name companies

  • Google (NASDAQ:GOOG) P/E is 20.35
  • Amazon (NASDAQ:AMZN) P/E is 134.65
  • Zynga (NASDAQ:ZNGA) P/E is 159

PEG Ratio

Apple is forecasted to have strong growth

The PEG Ratio is an indicator that assesses future growth of a company. It is the P/E Ratio divided by Long Term Growth. Anything below 0.8 is favorable.

  • Apple PEG is 0.7
  • That's at a 70% discount compared to the S&P 500
  • That's at a 62.5% discount compared to the computer hardware industry

Moving Averages

Apple is trending up

The moving average is the average of closing stock prices over a specified time. The current stock price is compared to moving averages to assess the trend of a stock. Generally, if the stock price is greater than the 50-day moving average which in turn, is greater than the 200-day moving average, the stock is trending up.

  • The 200-day moving average is $401.67
  • The 50-day moving average is $442.97
  • The current stock price is $497

.....Do the math

There are a lot more technical indicators used to analyze the value of a stock. I highlighted some of the main tools to show that even though Apple may appear to be expensive given the radical surge in prices over the last few weeks, it's actually a relatively cheap buy. So let's look at some of the fundamentals that support the indicators.

The fundamentals

Fundamental trading involves qualitatively assessing the value of a company by tracking company actions, strategies etc.

  • A myriad of companies have switched their operating system from Blackberry servers to IOS. This marks a shift in the corporate world from Blackberry, the firm that had traditionally placed a strong grip on the corporate mobile market. Halliburton (NYSE:HAL) recently announced the switch to IOS. This move also validates the credibility of the security of the IOS system, since a defense company such as Halliburton would naturally require prime security measures.
  • Given the large stock pile of cash, it is widely believed that Apple will provide dividends.
  • Although Apple may have saturated its markets in the US, demand in China is extremely strong. Sales have been increasing significantly in China and should continue to do so due to the burgeoning middle class and rapid urbanization.

The risks

  • Apple's Chinese suppliers have been associated with human-rights abuse. Apple hasn't been proactive in addressing these issues. Such bad publicity may tarnish the company's reputation and stock price.
  • Consumer electronics is an ever evolving world of fads and preferences. Apple needs to continually provide appealing products to maintain relevance and that creates uncertainty.
  • Competitors such as Google's Android have been eating into Apple's market share.
  • Exchange rate risk associated with foreign sales. This can be mitigated through hedging with foreign/US currencies, although the risk is still present.

Conclusion

So the fundamentals and technicals indicate that Apple is stronger than ever. Considering these indicators, I believe a 20% return is realistic and a conservative estimate since Apple has enjoyed much stronger growth with much weaker indicators.

  • Apple stock price has grown by 41.8% over the last year.
  • Apple stock price has grown by 145% over the last 2 years.
  • Some Wall Street investment banks expect a 12 month $700 target stock price.
Source: Why I See Apple Reaching $600 Within A Year