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The Long Case For Apple Inc.

|About: Apple Inc. (AAPL)

Elevator Pitch

At $400,AAPL is pricing in a 7% decline in cash flows in perpetuity post 2013 thereafter. Under similar assumptions, it turns out that the terminal growth rate is the same as that implied for HPQ! So unless you believe that innovation is dead at AAPL or that its end markets will start to decline it is a compelling buy at 400.

Thesis & Catalyst For Apple Inc. (NASDAQ:AAPL)

There are two key issues that have caused the market to sell AAPL:

1. Near term demand trends for "i"products have been significantly weaker than expected. Consensus revenue estimates for FY13 are down from $191bn in October 2012 to $182bn in April 2013 or a 5% decline

2. Margin sustainability: EPS estimates from FY13 are down from $53/share to $43-44/share or a 17% decline

Any company whose growth picture changes this dramatically sees a contraction in its multiple as investors question their prior growth forecasts. So it is NOT A SURPRISE that AAPl is down from its highs. Even if the multiple had stayed the same, the price would have declined at least 17%.

I believe that reduced expectations are somewhat valid. For one, the law of large numbers means that AAPL cannot sustain its historical growth rate. Secondly, there is clearly greater competition and AAPL is doing what good companies do - not waiting to lose the market to others but rather taking the lead in shaping it. Hence the iPad Mini.

But unless the end markets that AAPL plays in have gone into secular decline, like PCs, and that the innovation engine at AAPl is bust, it is hard to argue that the company should see its earnings decline at a rate of 7% in perpetuity.

If you're selling the stock at $400, you clearly believe that to be true. However, the evidence points to the contrary:

- Iphone and IPad sales trends measured on a Trailing 12 month basis clearly show that iphones and smart phones are on the growth part of the S curve

- Gross margins in Q1 were weaker by at least 5% due to product transtition costs. So normalized gross margins are in fact quite healthy

So what i'm saying is that you should buy the stock if you believe that Tim Cook and Co can continue to innovate. If not, then $400 may just be a stepping stone to a much lower price.

Valuation

If one assumes that AAPLe will still face declines in its cash flows but at a moderated pace of 2% then the stock should be worth $480/share. If however, it should grow about 0-1%% in line with large mature businesses like CSCO, MSFT, IBM then it is worth $580-$600/share. I like my risk reward at $400!

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.