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What's Apple Really Worth? Investor's Stress Test Offers an Answer

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A two-part story by Vitaliy Katsenelson explores the importance of analyzing fundamentals and psychology when we talk about Apple.

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There's been a deficit of positive writing and reporting about Apple (NASDAQ:AAPL) in recent weeks. But that is changing. Yesterday, the Financial Times interviewed Legg Mason manager Bill Miller who said that Apple is worth 50% more than its current price. Moreover, he said that "Apple is much more like Nike (NYSE:NKE), a consumer brand with great loyalty," than it is a phone or device maker like Nokia (NYSE:NOK) or BlackBerry (NASDAQ:BBRY). As news of the interview circulated yesterday morning, excitement rose, and by 10:30 a.m., the shares were up from $453 to $465 in a matter of minutes.

Here we see the psychology of Apple at play. In a two-part series for Institutional Investor, Vitaliy Katsenelson examines that psychology and argues that it was the predominant factor in the company's major stock drop-off last year. This psychology is what makes Apple difficult to own -- it drives the huge gains, and the big drops. Katsenelson, CIO at Investment Management Associates in Denver and occasional contributor to Minyanville, says Apple has built its reputation on black swans -- extremely rare and unpredictable events that have an enormous impact. The iPod, the iPhone, the iPad: These were black swans, "exceeding all rational expectation and revolutionizing, transforming and in some cases creating new categories of merchandise that had never existed before," he writes.

Katsenelson goes to on to discuss the company's future valuation, running it through a strenuous stress test. "We tanked its gross margins," he says. "We killed its sales growth to 2 percent a year for ten years, discounted its cash flows...." Yet his final figure depicts a still highly valuable company. (See his calculations, here.)

Any discussion of Apple's future raises one critical question, of course: Can the company remain aggressively innovative without Steve Jobs?

"As I mentioned in the article," Katsenelson told Minyanville, "it will be difficult to keep producing new black swans. But it spends over $3 billion on R&D, it is still a very focused company with really two products (in different flavors): PCs and iThinges. So I do expect great things from them, just not 'black swan' type of great things."

Read Katsenelson's articles:


Follow us on Twitter: @Minyanville
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No positions in stocks mentioned.
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