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Robert McDonald
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FROM INSIDE SILICON VALLEY: Sorting the truth or likely truth from the noise is a key attribute of the successful investor. My commentary is a distillation of some of this effort relative to particular stocks and investment areas. My publishing at this point in time is limited to the blogsphere,... More
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    Today's Wall Street Journal's Marketwatch site says that the market analysts are estimating earnings for Apple's December quarter (Q1 of 2011 fiscal year) at $5.25.  One more time they are missing the mark quite significantly.  Maybe they just cannot believe a success story like this one... one of the most sure fire investment opportunities of a lifetime.  Even Goldman Sachs came on board today adding Apple to its Conviction Buy list  and a $420 price target (hello, where have they been?) -- better too late (and too low) than never.

    My estimate of Apple's December quarter earnings is $6.50/share, 24% above what the professional market analysts are currently saying.  My calculation is based on using the simple assumption that Q1 will be up at least 40% vs. Q4 2010. This is a conservative estimate versus the Q1 2010 to Q4 2009 comparison in which earnings per share were up 37%. Why is this estimate conservative?  The Q1 '09 to Q1 '10 quarter to quarter gain did not have the iPAD contribution nor does it allow for increasing enterprise sales (business vs. consumer) success.

    Using a forward average run rate of $6.50 per quarter and a very conservative price to earnings ratio of 20 to 1, the stock can be expected to go to $520 per share in the next 12 months, $100 or about 25% above the current GS estimate. This of course ignores the likelihood that Apple will continue to grow its earnings over Fiscal 2011 at a rate that it has in the last couple of years.

    Growth engines with significantly increasing momentum include the IPAD, Apple's penetration in the enterprise and it's increasing sales worldwide, particularly in Asia.

    Disclosure: I am long AAPL.
    Tags: AAPL, GS
    Dec 13 11:29 AM | Link | Comment!
    The on-going cry for Apple to pay dividends continues unabated.  This recent Fortune Tech Apple 2.0 post "Is There Anybody Left to Buy Apple" is yet another example:

    The argument centers around Apple's current $51B in cash and equivalents with the likelihood that they will add another $20B in cash this year.  A Sanford Bernstien analyst cites the fact that Apple is only held by a few "Value Stock" funds and if this were to change it would drive up the value of the stock in and of itself.

    I for one don't think paying a dividend would change this situation all that much  (its a "high risk tech stock").  More importantly for shareholder value, there are plenty of other good uses for these funds and 
    I am glad that Apple does not have to patronize its stockholders and stock analysts in this manner. Dividends can came later when Apple becomes a stodgy traditional slow growth value stock and pumping up its valuation by this method actually provides an optimum return on the funds.   A point that is often overlooked is the fact that AAPL could produce a painless, much greater positive effect on its valuation by doing a stock split.  More than a few people consider Apple too expensive because of what is perceived to be a high price that in reality is not.

    A better use of these monies by Apple, as one example, will be the start up of a lot of server farms around the world using their own cash funds vs. taking out option limiting debt. I would be surprised if they didn't already have such a plan.  Apple can do this without breaking a sweat unlike some of their major competitors.  The first Apple server farm  is already in place in North Carolina and will be starting up by year end. These farms will enable the  migration of many computing tasks to cloud computing  in addition to supporting music and video downloads.

    Cloud computing has been around for a long time dating back to the times when the “network is the computer” was the catch phrase (with Oracle, Cisco and Sun proponents).  So what is the big deal now?  Well the tools are finally in place to make this happen on a large, reliable, secure and  cost effective scale.  Some pretty good tools for this purpose are already provided by Apple.  It can be claimed that the Apple Macbook Aire which has limited on board flash memory  data storage (no hard drive) is the first fully functional Laptop PC that uses cloud computing resources to lighten up and simplify what you carry around under your arm.

    The full power of the Apple iPAD Tablet, a truly revolutionary “computing” device, is also enabled by the cloud. Citrix took out a full page ad this week in the local San Jose Mercury Newspaper announcing a “Citrix Receiver" that enables the iPAD to run Windows 7 in a cloud mode! They have done the same for the just announced Google Chrome Laptop. This could be considered the second Laptop "PC" optimized for the cloud, if you can call it that (these things used to be called "smart terminals").  In the case of the latter, any serious computing function is carried out up in the cloud and the results sent back down.

    I have to believe that there are many other ways that Apple can spend its cash to provide great returns for its investors. Their efforts in revolutionizing the home entertainment experience for example have started. I have to believe they must be thinking of a one box does everything except the video display and the speakers. Let's really get it down to one iPAD type control device and send all the other remotes and the excess spaghetti wiring to the electronic recycling center where they belong.

    Thinking out of the box, how about an Apple spin off, engineered to minimally tax the energies of the existing management, that exploits Apple’s design methodologies and manufacturing skills in other potential high profit and value added areas. Beyond home entertainment this might include green home control systems, home appliances or fully automated automobile control interface systems.  The latter might include "Gucci like" elegant dashboard displays and controls that do all the relevant things, including entertainment and climate management. How about a "beautiful warm sunny day mode" that turns the aircon off, rolls all the windows down and turns the music up? Apple's skills in providing elegant and easy to use  user interfaces, with high tech functionality, might make for some great products.  The possibilities are endless.

    Apple is one of the best managed companies I know of and their capabilities beyond entertainment and computing remain untested . Let’s let them decide how to best deploy their cash and lets hope they look at some of the outside of the box opportunities that might be possible. I have every reason to believe that the stock holders will come out ahead if they pursue such opportunities.

    Disclosure: I am long AAPL, GOOG, MSFT, CSCO, CTXS, ORCL, HPQ.
    Dec 09 9:09 PM | Link | Comment!
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