It's very rare to find a stock that trades at more than $500 a share without it being overpriced. Apple (NASDAQ:AAPL) is definitely an exception to the rule. Despite resulting in tremendous returns in the last decade, the company is still underpriced. Indeed, owners of this stock (pretty much every fund manager in the country and most retail investors) could not be more proud.
Now it's time to look at future prospects of Apple. When we look at the past 10 years, Apple's average P/E ratio is 32.75. When we narrow it down to last 5 years, we get a P/E ratio of 21.88 and when we look at the last 3 years, we get a P/E ratio of 16.71. Currently, Apple's P/E value is 15.25 and it is stabilizing. In fact, Apple's P/E value moved very little in the last few years, except when it plunged big time during 2008-09 market crash.
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Moving forward, most analysts don't expect Apple's P/E value to fall below 15. As an innovative and fast growing company, the only way Apple's P/E value would fall below 15 is if we see a market crash. Having said that, analysts expect Apple's EPS to grow by 54% in 2012, 11.75% in 2013 and 7.48% in 2014. Given the company's tremendous growth so far, I find these numbers highly conservative. These analyst estimates also assume that there will be no new product being unleashed within the next 3 years.
According to most conservative estimates, Apple's EPS will be $39.16 in 2012, $41.80 in 2013 and $43.40 in 2014. If we assume a P/E of 15, this gives us a share price of $587 in 2012, $627 in 2013 and $651 in 2014. More liberal (and I believe more accurate) estimates assume that Apple's EPS will be $46.09 in 2012, $53.00 in 2013 and $58.90 in 2014. This gives us share prices of $691.35 in 2012, $795.00 in 2013 and $883.50 in 2014. If we apply Apple's 5 year average P/E to this equation, we get a share price of $1,288. Again, these estimates assume that Apple will not release a new product during this time and they are based on earnings growth on Apple's current products.
If Apple keeps Tim Cook's promise of "mind blowing products" within a few years, we can safely expect company to trade for a P/E ratio much higher than 15 as P/E values above 15 usually indicate growth potential. Also, keep in mind that Apple has about $100 per share in cash. When this is included in calculations, Apple's current P/E falls from 15.25 to 12.37, which is very low for a fast growing technology company.
Unless we see a market crash or stock split between now and 2014, I see no reason why Apple should trade for less than $850 a share by 2014.
Disclosure: I am long AAPL.