Why I am not worried about Apple’s share price.

  • Posted: 23 May 2011 10:55 PM

    There has been a lot written lately about how badly AAPL is undervalued, with much speculation as to why the market is behaving so irrationally. Horace has written with his usual prescient style on the subject a few times recently and it is an oft-discussed topic here.

    Comments on sites like our own or on places like Assymco present a number of cogent arguments as to why the stock is stagnating—along with suggestions to improve the situation: stock buybacks, dividends, better PR, etc. There’s also plenty of hand wringing and frustration ?? some folks have even abandoned their APPL investments in dismay ?? because of a fear that the sun will never shine again on Cupertino and the glory days are behind us.

    Here’s why I’m not the least bit worried about APPL:

    First, let’s acknowledge that options traders have a lot to be concerned about regarding the short-term health of the stock as it sputters along, and I’m not insensitive to their situation. The irrationality of the market can cost some folks their bankrolls, and that’s certainly cause for alarm. I wish everyone here the best, no matter their investing approach (unless you’re shorting APPL!).

    So please don’t think I’m being callous when I assert that, as a simple-minded long, I have a hard time getting too excited about today’s share price. With a timeline for retirement still at least five years out, I feel very comfortable entrusting a large part of my portfolio to AAPL. I believe we are in great shape for at least that long, barring any catastrophic macro events.

    Sponge and I spoke briefly on this subject last week in Vegas. It all comes down to this: do we really believe the Apple growth story or not? Will Apple continue to surpass Wall Street’s expectations over the next 3-5 years, or will it stumble, Microsoft-style, into incompetency and dormancy?

    If you think there is merit to much of the FUD, by all means, you should park your money somewhere safer. But if you buy into the optimism reflected in the rhetoric of this board—that the best part of the Apple story is still ahead—then grab some more of the Apple Pie while it’s still cheap, and hang on for the ride.

    Remember, we’re talking about a company that has grown EPS better than 75% on a consistent basis over the past few years, in the MIDST of a recession. Even conservative estimates on this board have it growing at 30% for the foreseeable future, with an upside well beyond that (if new products and an expanding ecosystem are factored in).

    Now, let’s assume that the market continues to treat APPL like an ugly stepchild and even REDUCES the PE to the 10-12 range. Even at those multiples, APPL will grow 20-30% yearly, at a minimum, as the earnings pull the share price upward. Face it, though undervalued by any fundamental comparison right now, APPL has still double TWICE since those woeful days of Feb 2007 when it was trading in the $80s. If PPS growth SLOWS to 24% a year, we’re looking at a double every THREE years. I’ll take that any day.

    Sure, it would be wonderful if APPL traded like AMZN and we could all cash in, buy our yachts and sail off to AFB Island—but that isn’t likely to happen. I’m not shrewd enough to play the options game (my full education on options to date came from a five-minute shouted discussion across a noisy table in a Vegas steakhouse!) so growing my money 20 to 30% a year sounds like a good deal to me.

    My conclusion: rather than fret at the unfair way the market is treating APPL, I’m continuing to scoop up as many shares as I can while they’re on sale. I hope and expect that wise investors will one day catch on to the great opportunity that APPL presents. But my greater faith is in Apple’s continued excellence. And like the child who found a full cookie jar unattended, I am secretly pleased that none of my siblings have arrived yet to share in my discovery.

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    Posted: 23 May 2011 11:36 PM #1

    rale - 24 May 2011 01:55 AM

    There has been a lot written lately about how badly AAPL is undervalued, with much speculation as to why the market is behaving so irrationally. Horace has written with his usual prescient style on the subject a few times recently and it is an oft-discussed topic here.

    Comments on sites like our own or on places like Assymco present a number of cogent arguments as to why the stock is stagnating—along with suggestions to improve the situation: stock buybacks, dividends, better PR, etc. There’s also plenty of hand wringing and frustration ?? some folks have even abandoned their APPL investments in dismay ?? because of a fear that the sun will never shine again on Cupertino and the glory days are behind us.

    Here’s why I’m not the least bit worried about APPL:

    First, let’s acknowledge that options traders have a lot to be concerned about regarding the short-term health of the stock as it sputters along, and I’m not insensitive to their situation. The irrationality of the market can cost some folks their bankrolls, and that’s certainly cause for alarm. I wish everyone here the best, no matter their investing approach (unless you’re shorting APPL!).

    So please don’t think I’m being callous when I assert that, as a simple-minded long, I have a hard time getting too excited about today’s share price. With a timeline for retirement still at least five years out, I feel very comfortable entrusting a large part of my portfolio to AAPL. I believe we are in great shape for at least that long, barring any catastrophic macro events.

    Sponge and I spoke briefly on this subject last week in Vegas. It all comes down to this: do we really believe the Apple growth story or not? Will Apple continue to surpass Wall Street’s expectations over the next 3-5 years, or will it stumble, Microsoft-style, into incompetency and dormancy?

    If you think there is merit to much of the FUD, by all means, you should park your money somewhere safer. But if you buy into the optimism reflected in the rhetoric of this board—that the best part of the Apple story is still ahead—then grab some more of the Apple Pie while it’s still cheap, and hang on for the ride.

    Remember, we’re talking about a company that has grown EPS better than 75% on a consistent basis over the past few years, in the MIDST of a recession. Even conservative estimates on this board have it growing at 30% for the foreseeable future, with an upside well beyond that (if new products and an expanding ecosystem are factored in).

    Now, let’s assume that the market continues to treat APPL like an ugly stepchild and even REDUCES the PE to the 10-12 range. Even at those multiples, APPL will grow 20-30% yearly, at a minimum, as the earnings pull the share price upward. Face it, though undervalued by any fundamental comparison right now, APPL has still double TWICE since those woeful days of Feb 2007 when it was trading in the $80s. If PPS growth SLOWS to 24% a year, we’re looking at a double every THREE years. I’ll take that any day.

    Sure, it would be wonderful if APPL traded like AMZN and we could all cash in, buy our yachts and sail off to AFB Island—but that isn’t likely to happen. I’m not shrewd enough to play the options game (my full education on options to date came from a five-minute shouted discussion across a noisy table in a Vegas steakhouse!) so growing my money 20 to 30% a year sounds like a good deal to me.

    My conclusion: rather than fret at the unfair way the market is treating APPL, I’m continuing to scoop up as many shares as I can while they’re on sale. I hope and expect that wise investors will one day catch on to the great opportunity that APPL presents. But my greater faith is in Apple’s continued excellence. And like the child who found a full cookie jar unattended, I am secretly pleased that none of my siblings have arrived yet to share in my discovery.

    Excellent post my friend.  Could not have said it any better myself.

    When SJ says we must make the best products in the world and the rest will take care of itself, I think he means it. ( although I still want a stock split now)  I suspect that if any of us took a peek into those super secret labs at Cupertino, we crap our pants and then go mortgage our houses and buy up more shares.

    Keep in mind folks we grew earnings over 90% in a recession, terrible iPad sales, old iMacs, same 8 month old iPhones, an OS that is almost 3 years old, and only about 20 more Apple stores from the year before.

    Wait until the economy really recovers in 2014, we have 500 stores, iPad 5 comes out, iPhone 8, and the Apple flat screen TV hits the market at $699.

    Rale we need you back in Vegas man so we can laugh again.  Despite our stock being in the pits, the group was full of excited enthusiasm over the future of our beloved company.  Not one person seemed depressed, because we all know that after each storm there will be a rainbow waiting for us.

    Keep in mind I started my Excel spread sheet in 2007 and revised it in 2009.  Right now we are on track to hit over $440 by late Oct.  And if we don’t we will 6 months after that.

    Keep your spirits up Boys and Girls for Bikini Bottom will have the biggest parties on this side of the continent for years to come.

         
  • Posted: 24 May 2011 12:18 AM #2

    rale - 24 May 2011 01:55 AM

    My conclusion: rather than fret at the unfair way the market is treating APPL, I’m continuing to scoop up as many shares as I can while they’re on sale. I hope and expect that wise investors will one day catch on to the great opportunity that APPL presents. But my greater faith is in Apple’s continued excellence. And like the child who found a full cookie jar unattended, I am secretly pleased that none of my siblings have arrived yet to share in my discovery.

    Colorful prose.  grin

    I’m not concerned about the share price either. It will move higher. Patience has its rewards.

         
  • Posted: 24 May 2011 01:39 AM #3

    adamthompson3232 - 24 May 2011 04:05 AM

    The only problem with AAPL’s slow ascent the last six months or so is that every month that goes by without appreciation brings us one month closer to SJ leaving the company. I’d like the stock to be at $500+ when SJ finally leaves. There is no doubt in my mind that Apple is the best positioned company in its markets to grow well into the double digit range for the next 3-5 years but AAPL’s P/E will go a lot lower very quickly if/when SJ leaves. Here’s to hoping SJ is around for many more years to come! I, too, am not concerned about Apple’s growth but I do worry about SJ leaving the company as valuation is largely tied to SJ from now until a few years after he leaves the company.

    Don’t worry about the p/e multiple. Concern yourself with earnings growth. With two more quarters of 70%+ eps growth and an FY2012 of 50% (or more) eps growth today’s p/e multiple won’t matter.

         
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    Posted: 24 May 2011 01:46 AM #4

    And honestly, 70%+ eps growth seems really conservative.  Depending on iPhone 5, we could be looking at 80%+ earnings/eps growth.

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  • Posted: 24 May 2011 10:19 AM #5

    DawnTreader - 24 May 2011 04:39 AM
    adamthompson3232 - 24 May 2011 04:05 AM

    The only problem with AAPL’s slow ascent the last six months or so is that every month that goes by without appreciation brings us one month closer to SJ leaving the company. I’d like the stock to be at $500+ when SJ finally leaves. There is no doubt in my mind that Apple is the best positioned company in its markets to grow well into the double digit range for the next 3-5 years but AAPL’s P/E will go a lot lower very quickly if/when SJ leaves. Here’s to hoping SJ is around for many more years to come! I, too, am not concerned about Apple’s growth but I do worry about SJ leaving the company as valuation is largely tied to SJ from now until a few years after he leaves the company.

    Don’t worry about the p/e multiple. Concern yourself with earnings growth. With two more quarters of 70%+ eps growth and an FY2012 of 50% (or more) eps growth today’s p/e multiple won’t matter.

    I totally agree with you , it doesn’t matter anymore the PE , the EPS ( actual 24 $ )will probably double in the next 5 years :D so who cares ?

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    Posted: 24 May 2011 04:03 PM #6

    It all comes down to the bottom line, profits and great design. Apple makes ‘em, the rest envy them, and everybody buys them. I suspect there are enough cookies in that Apple jar to keep the company doing well even if SJ shucks this Mortal coil. He is not the sort to burn the bridge of future success so that his name can become immortalised by comparison to his successor’s defeat. Nah; Stevie’s soul is Apple and that cannot be sold or discarded in the postulations of the envious in fickle markets. Though these etherial markets and their Dollars may nurture the mind of evil intent, Apple’s success cannot be debased by such games for it has products to sell, designs to make substantial, and best of all, customers in long lines who appreciate the details.

    Old wealthy men must save their names’ from historical ridicule through grand philanthropy torn from working man’s pockets. Steve Jobs’ Apple has forged a more enlightened path that the money markets cannot comprehend. Simply by spotless design that most find only in dreams this sybil of binary digits and plucky gadgetry has changed technology such that his world stands above the inspiration of awe.

    It isn’t just dollars that corners time and bests the stock market. And great Edsels, too, have failed to stand its wake. But the substance of Apple’s great products, inspirational ideas, trainloads of bankables, the demands and pleasures of customers unsullied by silly returns-‘n-yields-manipulators says it all.

    Money doesn’t reproduce in the pocket but in Apple’s hands, the future is its world.

    What! Me worried. I should say Not!

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    Posted: 24 May 2011 04:13 PM #7

    Rale, nice post! This has been a trying 6 months for a lot of us, especially if holding options. Sure seems that we’re putting in a very strong bottom here.

         
  • Posted: 24 May 2011 04:14 PM #8

    One hesitation.  I think Apple is neglecting Mac OS (not iOS). 

    The excitement seems to be new products (e.g. TV), not what was/is the core business, a computer and platform.

         
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    Posted: 24 May 2011 04:42 PM #9

    hledgard - 24 May 2011 07:14 PM

    One hesitation.  I think Apple is neglecting Mac OS (not iOS). 

    The excitement seems to be new products (e.g. TV), not what was/is the core business, a computer and platform.

    Lion is coming out this summer ...

         
  • Posted: 24 May 2011 05:16 PM #10

    Does anyone else find it a little odd that we have to make posts about how we aren’t worry about the stock price?  I think that this concept, more than anything else, highlights the fact that we ARE all worried about it.  If we weren’t worried about it, we wouldn’t be writing (or thinking) about it. 

    When Apple jumped last fall, I didn’t see any posts about not worrying about the stock price.

    Just my two cents.

         
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    Posted: 24 May 2011 06:29 PM #11

    Mikedmvp - 24 May 2011 08:16 PM

    . . .  I think that this concept, more than anything else, highlights the fact that we ARE all worried about it.  . . .
    Just my two cents.

    Well, for my nickel, Mikedmvp, I’d say there is concern, chagrin, constraint but definitely, in the end, concision that Apple will do well.

    I worry that my wee one will fall down something and really hurt himself but I go on loving him. Not throwing that one out with the bath water and the same goes for Apple.

    We, as a species, get comfortable with the way things are in the moment, and for what now seems like a good long time, Apple has been at the top of not only its game but of everyone else in the field ? no one has come near to knee level. That it might topple down the stairs, sure. Today,no. Tomorrow, most likely not. Sometime after tomorrow? Could happen but that tomorrow won’t be for enough time to bother worrying over today.

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    Posted: 26 May 2011 02:26 PM #12

    Apple: Price Stall Is Foundation Building, Not Topping Out

    http://seekingalpha.com/article/271991-apple-price-stall-is-foundation-building-not-topping-out?source=yahoo

         
  • Posted: 26 May 2011 02:41 PM #13

    Why do we worry ?

    I still am amazed that Apple does not call a stock split, and have no idea why they cling to the high price.  This is an artificial constraint, but for sure a constraint.

    My best guess is the one pointed out here at AFB, that the issue relates to the health of SJ, and to counter the impact of some event here.

    But generally, the high price seems odd, and counter productive.

         
  • Posted: 26 May 2011 08:01 PM #14

    hledgard - 26 May 2011 05:41 PM

    Why do we worry ?

    I still am amazed that Apple does not call a stock split, and have no idea why they cling to the high price.  This is an artificial constraint, but for sure a constraint.

    My best guess is the one pointed out here at AFB, that the issue relates to the health of SJ, and to counter the impact of some event here.

    But generally, the high price seems odd, and counter productive.

    Dr. L:

    Good to see you back in the AFB.  grin

    There’s growing sentiment it’s time for a stock split.

         
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    Posted: 27 May 2011 07:47 AM #15

    Drew Bear - 26 May 2011 05:26 PM

    Apple: Price Stall Is Foundation Building, Not Topping Out

    http://seekingalpha.com/article/271991-apple-price-stall-is-foundation-building-not-topping-out?source=yahoo

    Thanks Drew for posting the graphic. I pointed out those orange boxes to a few folks in Las Vegas. Others had seen ‘em, but the graphic is a nice way to make the pattern explicit.

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