What if You Could Buy Apple Pre-iPhone?

by: Jeffrey McLarty

Before July, Apple (NASDAQ: AAPL) is going to release a creative new product that will drive innovation in other companies, create a huge new revenue stream and make people wake up to notice Apple for more than the iPod. Wait, it’s January 2008, not June 2007, and that great product referred to, was already launched. Everybody now has a second chance at buying stock in the company at a price point equal to the price before the actual release of the iPhone. People were paying $130’s for the stock before they even knew how successful and amazing the iPhone was going to become, not to mention the iTouch. So, here we are 7 months later and the company is valued close to the same. Well, not quite; on several valuation ratios it is now much cheaper than last year, as the profits anticipated are materializing. Take a look at the last 6 years of average PE ratios, keep in mind the iPod launch:

2002: 79.4
2003: 112.4
2004: 90.9
2005: 46.1
2006: 30.8
2007: 50.5
ttm: ~30

“Oh sell everything the game is over” is what the market did Tuesday afternoon when Oppenheimer gave extra conservative guidance with Apple’s normal tongue-in-cheek style predictions. Apple’s management likely guided conservatively (more so than usual) taking in the consideration of the economy, while investors priced it the same, a double margin of safety: two wrongs don’t make a right. What I can’t believe is how nobody, except those I deem visionaries, realize the magnitude of directions for growth. Everybody is so focused on how many iPods, but everybody has lost sight of how many directions they can go with a much more important ‘i’, innovation. Apple can do anything Microsoft (NASDAQ: MSFT), HP (NYSE: HPQ) , or Sony (NYSE: SNE) already does, except with a better user experience - and that’s what sells. Their balance sheet says they can do anything they want in terms of acquisitions too.

For fun, some of my personal predictions include: Apple enters the printer and camera space simultaneously with one new innovation, Apple enters the video game space and sells a portable version of the Wii, Apple takes on Logitech (NASDAQ: LOGI) and sells new gesture based input devices, Apple tales on the search giants & Facebook at the same time by completely innovating the revenue model, interface & functionality and linking it to the next iTouch. Of course more likely predictions include taking on RIM (NASDAQ: RIMM) in the corporate space of smart phones and it’s not too far fetched to see them releasing an even better/more powerful iPhone within 4 months. One of my favorite predictions comes from, Howard Lindzon, who is predicting the “Bank of Apple“. If anybody can make banking cool, it’s Apple.

Another reason investors should like Apple is the swings it gets in implied volatility. Writing covered calls (and hence applying our catch phrase, “covering the uncovered”) is a magnificent way to hold Apple for the long term. People are constantly willing to over pay for the option to buy Apple in the future because it’s a deal stock with constant media attention. Owning it before Macworld, one could have written February call options above $220 for a meaningful amount because of the ridiculous expectations the market had for Apple.

Disclosure: Author is accumulating Apple.