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Michael Fu
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Value investor. 12+ years in corporate finance and i-banking. MBA from Kellogg School of Management, BBA from University of Michigan, and CFA charter holder.
  • Apple: Buy Or Sell? 0 comments
    Aug 2, 2012 7:10 AM | about stocks: AAPL

    Apple's recent earnings miss. Apple vs. Samsung lawsuit. iPhone 5 rumors. cheap valuation (10-12x P/E). $115 billion cash balance. $600 per share and $550 billion market cap, the largest market cap company. Is Apple a Buy or Sell? Let's look through the facts:

    Valuation (at a stock price of $600): market cap ($565 billion), 2012 sales ($150 billion, 3x sales multiple), 2012 EPS ($50.00, 12x P/E multiple), cash ($118 billion, or 21% of market cap, or $125 cash per share), no debt

    Dividends/Stock Buybacks: $10.60 annual dividend recently initiated with first shareholder record date of August 13, 2012 (1.8% dividend yield, 20% dividend payout ratio), $10 billion stock buyback authorized (approx. 10% of cash balance)

    Market Share: Mobile Worldwide (12.5% Samsung, 7% Apple), Mobile U.S. Only (Samsung 26%, Apple 14%), P.C. Worldwide (6% Apple), P.C. U.S. Only (11%)

    Business Segments: iPhone (38% of sales), P.C. (28% of sales), iPad (12% of sales), Others including iPod, iTunes, Software, Peripheral (20% of sales)

    Growth and Margins: Revenue growth of 15-20% (2Q2012 Revenue grew 23% year on year). Gross Profit Margin (40%) and Net Profit Margin (25%)

    Risks: Sales, profits and overall success of Apple heavily depends on the success of the next iPhone 5 (rumored to announce on September 12, 2012). iPhone currently comprises 40% of sales and 60% of profits.

    Conclusion: Apple looks like a Buy in my opinion. It is very rare to find a company/stock that has 40% gross margins and 25% net margins, with revenue growth of 15-20%, that currently trades at only 10-12x forward P/E. Add to that, the 1.8% dividend yield and $125 cash per share , and you've got a once-in-a-lifetime value stock (no wonder David Einhorn of Greenlight Capital is long Apple).

    Target Price: A stock with 15-20% sales growth typically would trade closer to 15-20x P/E as a fair valuation. Note some growth stocks trade at P/E multiples up to 2x sales/eps growth, but let's not get greedy. At $50 EPS per share, a fair 15-20x P/E valuation would imply a target stock price of $750 to $1,000 per share (25-65% upside).

    But as highlighted above, the product risk of the success of the next iPhone 5 is a real concern. Given iPhone comprises 40% of sales and 60% of profits, a mis-step on the next iPhone model could be very costly to Apple shareholders.

    Risk Mitigation: One way to mitigate that risk would be to purchase insurance: Buy Nov 2012 put options at say strike price of $500, to limit your downside to only 15-18%, in that very unlikely scenario that iPhone 5 is a total miss with consumers. The put would only cost you $7 / share, or about 1.2% the cost of an Apple stock ($600 / share).

    Disclosure: I am long AAPL.

    Themes: Apple, iPhone, Technology, Value Stocks: AAPL
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