Apple: Stop Comparing Apples To Oranges

| About: Apple Inc. (AAPL)

Raising our kids, by far, has been the most gratifying adventure for my wife and I. While we've read every meaningful book we've come across and taken as much advice we could ranging from "what to expect when you are expecting" to "how to cope of terrible 2's", nothing could help us understand "why some good people say the most stupid things"! They would say things like:

"When my kid was your kid's age, she was about 10 lbs heavier than your kid; you should try feeding her solid food right now!" or "Your boy is so cute and adorable; look at my kid...while he is younger, he has gotten way too big for his age!"

If you've got kids of your own; I'm sure you've got your own funny stories to tell. I guess it is human nature to compare (just like parents compare siblings) and unfortunately...sometimes, we forget that we shouldn't compare Apples to er...Oranges.

Apparently, no one bothered telling that to a successful person like Doug Kass or a fellow SA blogger who attempted to compare it with Cisco (CSCO). Kass wanted to short Apple; I understood why he said what he said. A blogger with no skin in the game is a different story.

Gene Munster of Piper Jaffrey and Brian White of Topeka Capital Markets made waves recently by issuing a $1,000 price target for Apple (AAPL). I found this weird because Munster has always been very conservative with his calls. Will $1,000 be the new floor or will his sudden change of tune be Apple's swan song and be the necessary prick that pops the bubble? Is it fair to make judgment on Munsters' current call based on his past calls?

My readers know that I like to connect the dots backwards in order to find sanity amidst these frothy bubble like days when Apple keeps on making new highs. Is $1,000 really that far fetched and is there any substance behind comparing Apple to the other tech companies?

From the chart below (Y Charts), I've plotted Apple's price and PE since 2008 (US recession). It is interesting to note that despite Apples' financial performance since the recession, its PE multiple have not caught up with it. In fact, as I've written here before, it contracted. What happens to the stock price if its multiple reverts to its historical average? What price would you get if the market gave Apple the same PE multiple as Amazon (AMZN) or Priceline (PCLN)? Why not?

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The chart below compares Priceline , Amazon and Apple and their respective PE ratios since before the recession here in the US.

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As you can see from the chart above, Amazon's PE ratio today is about 4x higher than it was in 2005! As we got out of recession around July 2009, Amazon was still trading at more 40x PE. What I find interesting about this is that Amazon has always operated with razor thin margins (extreme opposite to Apple's high margins) and low earnings yield; however, it has almost always sported high PE ratios relative to Apple regardless of the prevailing economic environment. I'm not suggesting that Amazon and Priceline are bubble stocks; I'm merely fascinated at how Apple seem to attract a lot of naysayers.

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Believe it or not, Apple's PE today is about as low as it was during the recession (see chart below).

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So, why are we so worked up about what Revenue or EPS beat Apple needs to have for the shares to hit $1,000 or compare it to another tech darling circa 1995 like CSCO? Does it have to be this complicated?

Obviously, it easy to just pull any old chart of a "has been" stock market darling and compare it to Apple . It makes great headlines and is a sure fire way of getting eyeballs. The Ugly Truth is, once you peel the layers off, the picture is totally different. Here is a chart comparing Cisco (1995 to 2000) and Apple.

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At its height (1995-2000), Cisco was trading at 150x PE or 5x Apple's multiple. Aside from being market darlings (CSCO then and AAPL now), the fundamental performance between the two couldn't be any more different.

What do you think happened to CSCO after 2000? It doesn't take a rocket scientist to figure out what these link bait articles want you to think! Fact is, BOTH Cisco and Apple cratered. Cisco fell harder as its fundamental valuation never really supported its stock price.

As you can see from the chart below, it compares Apple and Cisco from 2000 to 2010. You will note in 2008, as we entered a recession, Apple traded with a PE of 39x while Cisco traded at 29x before falling with the rest of the market. Today, Apple trades at 18xPE while Cisco trades at 16xPE.

What these Apple "experts" fail to disclose is...Apple has always managed to resume its trajectory after every major corrections as you can see from the chart below.

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I'm sure I'm going to get these Apple doubters to say "But Steve is gone!". I've written about it here; get over it...the show must go on. Either you've got skin in the game or you don't. Let's compare Apples to Apples; instead of Apples to Oranges!


  • Apple continues deliver and beat incremental revenue and earnings guidance and
  • The absence of any epic macro economic chaos (like the one that brought down Bear Sterns et al)

Apple only needs Wall Street to change its sentiment (not the current consensus "lame" strong buy with measly $699 targets) towards the story to get this train really moving. I mean, take a good look at these estimates:

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Look at it this way, between the earnings "miss" that I wrote about last October and its most recent monster quarter, the only thing that has changed (at least in my simple mind) is the willingness of some of the Wall Street Analyst to raise their price targets to a reasonable level that would reflect the company's fundamentals (hence, the PE expansion). The story isn't any different from the first time I wrote about it here at SA or when I sarcastically wrote "Why it will never be a $600 stock" last July.

Apple at $1,000 would mean that it will have a market cap of a trillion dollars! This has never happened before and it will continue to attract naysayers. I think the story will unfold like this:

  • The $1,000 price target will be frowned upon and met with disdain. Apple "cannot" be bigger than Exxon (XOM); it does not produce a core necessity - therefore, it must be forming a "bubble". But, surprisingly, it will continue to march on.
  • It will retrace; detractors will call it the beginning of the end.
  • Apple continues to deliver; China and Brazil continues to fuel its international growth. Shares are bought on dips as the funds that may have missed it before will now find the dips as their entry points. Dividend and Value funds are now looking to buy or add to their positions.
  • As the shares marches beyond $700, the Analysts who held back with their price targets will get bolder with higher targets as the quarters progress.
  • Google (GOOG), with its purchase of Motorola (MMI), begins to manufacture its own Droids. This creates the opposite effect as it drives Samsung, HTC and LG to push the price of their phones lower.
  • As the next gen iPhone comes into play, iPhone 4 gets priced at $0 with a contract; while the 4S competes with most Droids at the sub $149 level.
  • How many long time Apple bulls sold off at $450 or $520 levels? I'm sure they are wanting to see the train make a pit stop!
  • The Street cannot afford not to have Apple in their portfolios; this would risk having their fund(s) underperform.

Where will the extra $300B in market cap come from? Simply, from the Wall Street Analysts tripping over themselves. Who missed the run and sold at $450 or $520? I'm betting these guys (or gals) want to get in the party again. Finally, we are starting to get the wind behind our back!

While I'd love to see Apple hit $1,000; I'm not losing sleep over the prospects. I'll continue to play the cards that I'm dealt with and will buy the dips using LEAPs along the way.

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I told my wife that the reason why some people like to compare their offspring with others is probably to compensate for their own insecurity. Maybe, it provides them a sense of comfort to justify something in their own life that they do not and will never have. Maybe, some of them are just mean spirited and have a hidden agenda.

Remember what I wrote when Steve (RIP) passed away...

I'd like to be able to look back years from now, read this very article and say that I'm glad that I trusted these 'dots' to be somehow connected with my future. And I'm glad that my decision was without a doubt the best financial decision that I ever made during the uncertain time when Steve passed away.

I expect Apple to continue to execute flawlessly. Until something meaningful changes, I'm still all in. Maybe my own personal 'dot' in the big picture is to have a reader one day email me and tell me that reading my articles made a difference! Let's face it, Wall Street doesn't care who died; it only cares about making money. As long as Apple keeps on performing, it will be business as usual. That is the UglyTruth.

Again, your mileage may vary.

Disclosure: I am long AAPL.