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Examining Apple's Forward Valuation
December 7, 2012 02:30 PM
The following is a sample report of Sean's
Ok folks, as I've been getting a few questions on
) it's easier to answer them in one post, and in fairly condensed fashion, as they all come around to the same theme.
The main one is simple -- What the heck is "wrong" with AAPL?
To this I must say I just don't agree with this perspective. As someone who can remember distinct purchases of the stock myself in the $50's (July 2006), the $70's (on iPhone announcement), the $120's after a monster good quarter in 2009, and I could name a lot more examples at lower and higher prices, I just think many people have lost perspective. How can a stock that has gone from $50 to $540 in 6 years be acting that "wrong" on a 20% drop after a what, 1000% rise?
Frankly, given the rise of Android, I'm surprised we haven't seen this sort of a drop sooner than this year. In effect, I've written a lot of "potential warnings" on this name and favored
) and have been early. I will still say that I favor GOOG over AAPL longer term, but I do think the next 50-100 points in the short to intermediate term will happen for AAPL. In fact, we have just seen such a move when AAPL burst from my $512-516 level into the $580's. I wouldn't be shocked to see another 50-100 upside move in the AAPL.
So I'd ask not what is wrong with AAPL, but simply what is causing the downside -- ie., the real reasons?
So much has been discussed about early tax gain selling. Ok, I'll agree with this to only a minor degree. As usual, I don't agree with the masses and think the answer is more structural and largely twofold, though I add a bonus or two.
1) First the big money got to a point where they owned Tech by just owning AAPL. This was just wrong, couldn't last, and is now being unwound. As we see developments on budgets from
) among others we will see the bandwidth arms dealers see some money come back into them. As we see Cloud proliferation continue, the Cloud merchants will see buying. As we see intense deep value come into the Wintel space, we will see money come back into them. This all is quite healthy. I could add other sub-sectors, but you all get the point.
2) AAPL became just too big an allocation in the indices and the eventual decrease by the indices is being preemptively sold by the funds. To be precise, I believe we are about to see a fairly substantial decrease in the 20% weight in the QQQ, as well as its weight in the Nasdaq and the S&P 500. I've seen no announcement of such, but I think this is a pretty easy prediction to make. I have been critical of the Nasdaq for not reducing the AAPL weighting already. To me, the move to reduce the weighting is overdue, but it will surely come.
3) There are other potentially huge Tech winners emerging. As just one example, I'd say that FB is starting to garner some serious institutional buying and this buying is in lieu of former AAPL buying. I just tweeted that I can see a new "horsemen trade" in tech emerging.
Palo Alto Networks
) and maybe
(BLOX). Right now I'm going to say that FB FIO and SPLK are in that horsemen group for me. Thus when we get real risk-on again look for the true growth buyers to seek these names and others like them, as these are the new 35-60% YoY growers. And that is the growth rate that the growth funds seek out.
4) Fiscal Cliff proxy. What I mean here is that AAPL is essentially the fiscal cliff proxy trade. While not perfect, it's darn close. When fiscal cliff seems to be "solved," AAPL has been very strong. When it seems most at risk of "going over" the cliff, AAPL has had its worst days.
Bottom line, all this adds up to largely structural selling and very little real fundamental support. Is AAPL's growth slowing? Yes, but it has for a couple years and I'd add the growth rates in EPS, cash and or even revenues is still extremely divergent compared to the 7-8 PE net of cash and that sub 0.50 PEG level. As I detailed a few AAPL notes back, this is a stock that will in 3-4 quarters be sitting on something like $200 billion in net cash and around that time will be producing $55-60 in EPS... actually that number is low as I'm at $65 by then. So let's do a quick table:
AAPL value net of cash at $55, $60 and $65 in EPS (assumes current price):
1. PE net of cash at $55 = 9.7 and 5.8 net of cash
2. PE net of cash at $60 = 8.9 and 5.35 net of cash
3. PE net of cash at $65 = 8.2 and 4.93 net of cash
Now I don't have to do a double take as I've analyzed AAPL PE's net of cash like this for years after significant price drops. But I think many will do a double take. Also, these valuations make even less sense when one adds in a div. yield, which is above a 10 year Treasury and many other factors. Effectively, AAPL has just priced in a negative to Zero growth scenario, even though if they get to $60 in EPS that will represent 35% plus growth. Even though I've cooled on AAPL in the last year, I don't think they are headed into a Zero to negative growth scenario in the next 1-2 years. In fact, if they do anything intelligent with the cash at all they can nearly guarantee solid future growth. And therein lies the biggest bearish counter. The assumption that AAPL could become a
Research in Motion
(NOK) (or the AAPL of old), completely ignores the greatest level of balance sheet cash ever generated.
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Position in AAPL, GOOG, FIO, FB.
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