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January 29, 2007

A Look at Apple's Valuation

After reading through a lot of analyst comments about Apple's earnings, I think I captured the general consensus well with my follow-up piece. Most analysts agree with my bullish view and the fact that numerous catalysts exist over the balance of 2007, particularly as the June and September quarters become the focus of investor attention. As far as the March quarter, most analysts think that the guidance was conservative, especially as it relates to margins.

Following the big EPS beat in 1Q07, the consensus estimate has moved up to $3.18 vs. about $2.80 previously. Apple ended the quarter with $13.44 per share of cash. Extrapolating interest income from recent quarterly reports indicates that the cash balance might contribute about 43 cents to earnings in fiscal 2007. Adjusting the current price for the cash balance and its contribution to EPS reveals that APPL is trading about 27 times projected 2007 earnings. The multiple comes down another point if AAPL gets credit for its probable calendar year end cash balance. 2008 consensus is now at $3.75. Adjusting this figure for cash balances and interest income puts APPL about 21 times 2008 estimates.

As a comparison, Google trades.....

at 35 times current year estimates, Microsoft trades at 20 times, and Cisco Systems trades at 20 times. Hewlett Packard, the other company gaining share in PCs, trades at 17 times. Looking at other growth stocks, Starbucks trades at 40 times, Disney trades at 20 times, and Whole Foods trades at 30 times.

I'd argue that AAPL that has as good as or better 2007/08 fundamentals than any company on this list except GOOG. Therefore, I think 27 times 2007 earnings is at worst a fair valuation, and in reality a cheap valuation for AAPL. And if APPL executes over the balance of 2007, the stock looks extremely attractive on 2008 estimates.

With AAPL shares giving up the bulk of their post iPhone related gains while 2007 estimates, with a minimal iPhone contribution, moved up sharply, I think an attractive entry point is at hand. Furthermore, based on my extensive reading of Real Money, Street Insight, other investment sites, technology/gadget sites, and blogs, it is my opinion that sentiment toward APPL shares is cautious. In fact, there is an overwhelming sense that APPL is going to fail either with the iPhone, iPods, Macs, or all three. I think the combination of cautious sentiment, the recent pullback, increased estimates, and a series of positive catalysts over the next six months reinforces that now is a good time to be long AAPL.

And for those of you who just can’t get enough, rumors are that AAPL has bought a Super Bowl ad. Speculation is that the ad will feature a deal that will give iTunes a three month exclusive on the first ever legal digital downloads of The Beatles catalogue. Other speculation focuses on whether a Beatles specific iPod is coming, including the possibility that a Beatles deal will be announced along with a long awaited touchscreen video iPod. I'd bet that the ad is iPhone related. Regardless, just when I was hoping the chatter around APPL might die down, it looks like we got another week to go before things calm down a bit.

Posted by Steve Birenberg at January 29, 2007 02:08 PM in AAPL