In response to fantastic AAPL price models and forecasts often mentioned in discussions in the AFB and other AAPL-related boards around the Web, I’ve posted a response.

As an investor (not a trader) I’m keeping my share price forecasts at a reasonable 22 times trailing 12-month earnings. Considering Apple’s current rates and earnings growth long-term investors should continue to be richly rewarded. However, at price multiples above 25 times trailing earnings investors may be buying into a bubble. I do expect the share price to double or near double over the next twenty four months. That’s a pace of price appreciation that should satisfy all but the most impatient investors.

The missive, due to its length, I posted at Eventide.

DawnTreader - 20 March 2010 05:49 PM

In response to fantastic AAPL price models and forecasts often mentioned in discussions in the AFB and other AAPL-related boards around the Web, I’ve posted a response.

As an investor (not a trader) I’m keeping my share price forecasts at a reasonable 22 times trailing 12-month earnings. Considering Apple’s current rates and earnings growth long-term investors should continue to be richly rewarded. However, at price multiples above 25 times trailing earnings investors may be buying into a bubble. I do expect the share price to double or near double over the next twenty four months. That’s a pace of price appreciation that should satisfy all but the most impatient investors.

The missive, due to its length, I posted at Eventide.

Thank you for an excellent analysis that presents some credible baseline numbers to keep in mind.

firestorm - 20 March 2010 06:23 PM

Thank you for an excellent analysis that presents some credible baseline numbers to keep in mind.

Thank you for the feedback. 

Again, I’m looking at this from a long-term investor’s standpoint and I expect patient investors to be rewarded over the next twenty four months. I will get concerned about short-term potential for the shares should the price move to 25 times earnings (or higher).

At 22 times trailing 12-month earnings I consider AAPL to be a bargain. Should AAPL be beaten down (again) to a multiple of 20 (or slightly less), I’d be buying whatever I can and I’d be scrounging around for pocket change to buy more.

DawnTreader - 20 March 2010 09:34 PM

At 22 times trailing 12-month earnings I consider AAPL to be a bargain. Should AAPL be beaten down (again) to a multiple of 20 (or slightly less), I’d be buying whatever I can and I’d be scrounging around for pocket change to buy more.

P/E ratios are relative. In the 70’s market P/E was 10 or less:

Average has been what, 15? I know it’s higher again now, and Apple will have a higher P/E as a growth company (still) but if there’s a market-wide re-valuation of prices based on earnings, AAPL will follow.

Of course, as a long who doesn’t play on volatility, I’d much rather see the optimistic scenario hold.

DawnTreader - 20 March 2010 05:49 PM

In response to fantastic AAPL price models and forecasts often mentioned in discussions in the AFB and other AAPL-related boards around the Web, I’ve posted a response.

As an investor (not a trader) I’m keeping my share price forecasts at a reasonable 22 times trailing 12-month earnings. Considering Apple’s current rates and earnings growth long-term investors should continue to be richly rewarded. However, at price multiples above 25 times trailing earnings investors may be buying into a bubble. I do expect the share price to double or near double over the next twenty four months. That’s a pace of price appreciation that should satisfy all but the most impatient investors.

The missive, due to its length, I posted at Eventide.

Wall Street needs a new metric for stock valuation.  P/E’s are a reflection of irrational exuberance in AMZN’s case, so your caution about AAPL’s P/E above 22 should be heeded if you’re the conservative sort like myself.  I also think AMZN’s P/E of 60+ makes assertions about any P/E being “sustainable” difficult, if not just plain hopeful.  Thanks for a good read DT.

I would say the crux of your rationale is here

Though Apple is growing faster than HP and IBM, Apple’s long-term challenges of managing success and managing growth are more akin to HP and IBM than to the challenges at Amazon or Google

Is that based on some feeling ore on concrete evidence?

My feeling is quite different.. Apple long term vision and strategy started ten years ago but is far from being fully deployed and make Apple long term perspectives at least better than Google’s

Roman - 21 March 2010 04:48 PM

Average has been what, 15? I know it’s higher again now, and Apple will have a higher P/E as a growth company (still) but if there’s a market-wide re-valuation of prices based on earnings, AAPL will follow.

Of course, as a long who doesn’t play on volatility, I’d much rather see the optimistic scenario hold.

I expect to see valuations fluctuate and also expect, based on the sentiments of the overall market, for Apple’s p/e to rise above the current 22 times trailing 12-month earnings. The question becomes one for long-term investors what are the best entry points?

I see today’s share price as an excellent entry point for long-term investors and should the stock get hammered in the short-term and beaten back to a p/e of around 20, a downright bargain for the money.

I see the range between 22 times earnings and 25 times earnings a safe spot and caution above 25 times earnings as frothy pricing tiers. My view is three to five years out from today and again see today’s trading price as an excellent entry point for long-term investors.

Hamourabi - 21 March 2010 05:12 PM

My feeling is quite different.. Apple long term vision and strategy started ten years ago but is far from being fully deployed and make Apple long term perspectives at least better than Google’s

I see Google entering another period of accelerated earnings growth, the Nexus One not withstanding. In all I think releasing a phone was a big mistake and the company’s fortunes are tied for now to advertising and increasingly advertising in the mobile environment. That doesn’t make Google’s long-term prospects better or worse than Apple’s but it does make their strategies different.

Apple is primarily a hardware company are major retailer with growing revenue from services. Working in Apple’s favor are popular products, an increasing global retail presence and solid positioning in the mobile product markets.

I think you’re savvy enough to do the math. Take Apple’s current rate of earnings growth, apply it to this fiscal year and next and then apply a projected p/e multiple. One comes up with a nice number. Looking three to five years out from today and appreciating the pace at which Apple is expected to grow over the next eighteen months to two years, even with a conservative p/e applied, it provides for significant share price appreciation.

Apple will near $60 billion in revenue this fiscal year, perhaps as much as $75 billion in revenue next fiscal year. Apple may surpass MSFT both in revenue and market cap over the next 12 months. Maintaining consistent eps growth at 20%+ as the company moves beyond $75 billion in annual revenue will be a challenge. I do, however, expect Apple to accomplish this feat.

The question is not one of whether or not Apple will continue to grow revenue and earnings at a torrid pace over the next eighteen to twenty four months but where today’s growth will lead three to five years out from today. Please remember growth in eps is not only a function of earnings growth, it also includes a factor for the growth in the number of shares outstanding. Apple is experiencing a noteworthy creep in share dilution due in part to stock-based compensation.

As I’ve said, I’m as bullish on AAPL as ever.

DT my reason fully agree with you,  but I cannot help feeling that DELL P/E being 20,  AAPL P/E could be close to 30 !

Hamourabi - 22 March 2010 12:16 PM

DT my reason fully agree with you,  but I cannot help feeling that DELL P/E being 20,  AAPL P/E could be close to 30 !

I don’t think the market will support a p/e of 30 on AAPL at this time. Please remember I do have a 12-month price target of $384 per share. I expect Apple at today’s p/e to reach that price target by the end of April next year.

It’s an issue of what price range will most reward long-term investors planning to step into AAPL.