One of the more fascinating things about watching the market five days a week is just how fast sentiment in the financial press can change on the markets, a sector or a stock in the world of 24/7 cable coverage and the cornucopia of financial pundits trying to break through the clutter. Nothing demonstrates this better than the 180 degrees turn on Apple (AAPL) in the last few weeks. A month ago the Cupertino tech juggernaut could do no wrong and pundits were slathering over themselves speculating on when the shares would hit a $1000 or when Apple would become the first trillion dollar stock.
In a course of a few weeks, this has been replaced by stories on how Apple has lost its mojo, how the competition is catching up or that the company's best days are behind it. So what caused this? A bad earnings report? Dismal guidance? A poor presidential debate? No, two of the main drivers of the decline are that Apple only sold 5mm iPhone 5s (A record for an iPhone launch) over its first weekend and a mapping program that was incorporated before it was ready. Investors that have been begging for just a slight pullback to get into the stock are now hesitating now that Apple has had a 10% pullback. My advice is to examine the investing case for Apple, tune out the pundits and pick up the shares on the cheap as there are myriad reasons to believe the company's future is still bright.
10 reasons to remain bullish on Apple:
- Apple is just too cheap given it is selling for 10 times earnings after subtracting the $120 a share worth of cash on its balance sheet.
- The company is on track for almost 45% revenue growth in FY2012 and analysts expect around 25% sales increases in FY2013. The stock sports a five year projected PEG of under 1 (.60). This is substantially lower than other tech juggernauts like Google (1.18) or Amazon (9.91).
- After this 10% haircut, Apple's valuation make it a compelling buy in advance of iPhone 5 sales figures. The stock is selling near the bottom of its five year valuation range based on P/E, P/CF and P/B.
- There should be an announcement of an iPad Mini in the near future. The company should also offer a refresh for the iPad and eventually a rollout of iTV as well.
- Apple just initiated a dividend and yields 1.6%. Given the company's prodigious excess cash flow and cash on the balance sheet, hard to see how payouts don't at least double over the next five years.
- The 46 analysts that cover the stock have a $780 price target on AAPL, implying 25% upside from the current stock price.
- There is powerful ecosystem that surrounds all of Apple's products which gives a moat around its business.
- Consensus earnings estimates for both FY2012 and FY2013 have moved up nicely over the last month. The company also reports earnings on October 24th and there should be some buying in the lead up to the report.
- The company is just scratching the surface in the two biggest countries in the world, India and China, which will be huge drivers of growth in the future.
- Unlike Amazon (AMZN), Apple translates revenue growth to the bottom line. In addition to its stellar net income growth of the last few years, the company has quintupled its operating cash flow in the past three years.
Additional disclosure: I am also short AMZN