It's Not Too Late to buy Apple
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Apple (NASDAQ: AAPL) were rising by a 9% on Wednesday after the company delivered another blowout earnings report. The company keeps proving its detractors wrong as rumors about soft iPhone sales or problems with carriers seem to be unjustified and Apple reports extraordinary results quarter after quarter. Apple is delivering, no doubt about that, but the big question still remains - is the company overvalued due to excessively optimistic expectations or is there still upside at current levels?
In the following table we compare some valuation ratios and financial statistics for Apple and four successful and innovative companies. There is no easy way to tell which company is comparable to Apple, since we are talking about very particular businesses here, but we can agree at least on the fact that Apple deserves to be compared with the best companies in technology.
Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG), Ebay (NASDAQ: EBAY) and Netflix (NASDAQ: NFLX) are four very innovative enterprises with high growth potential, and we could say that Apple fits into that exclusive group of high quality innovative companies quite well.
Some conclusions from the numbers:
- In terms of P/E, Apple is cheaper than all the companies of the group except for Ebay. The difference is not too big since Apple is barely below 16 while Ebay is at almost 15.5. Other companies like Amazon and Netflix trade at much higher P/E ratios
- Apple has the lowest Forwad P/E of the group below 11, only Google comes close with a forward P/E below 12.
- PEG ratio, which calculates the ratio between P/E and expected growth rates, is also the lowest for Apple at less than 0.9. Google is near 1 and the rest of the companies above that level.
- Expected growth rate over the next five years for Apple is similar to those estimated for Google and Netflix in the 18% area. Ebay has a much lower expected growth rate at 13.3% and Amazon looks better with an almost 26% annual expected growth rate for the next five years.
- Amazon is a very particular case, since the company is reducing prices and profit margins in order to gain market share in many products. Amazon could have much higher earnings if it decided to raise prices and grow a little slower, so numbers could be hard to predict for this leader in the online retail space.
Apple doesn´t look too expensive at all when compared to the valuations carried by other big tech companies, and it certainly looks like there is upside room from this point of view. If we look at historical valuations the conclusion is pretty much the same: Apple has a five year average historical P/E ratio of 22 which is above current levels.
Just to play a little bit with the numbers, let’s do some math about possible price targets for Apple. Analysts are expecting $51.09 in earnings per share for the next fiscal year ended in September 2013. Those estimates could be increased after the latest earnings report, and Apple usually reports better than estimated, but let´s err on the conservative side and state that Apple will report $ 51.09 in earnings per share next year.
With $ 51.09 earnings and a P/E ratio of 15 Apple would be trading at a price of $766 and if the P/E ratio were 20 the price would need to be 1022. Those assumptions are not too optimistic, since we are being cautious about earnings estimates and choosing valuation multiples which are reasonable based on comparable companies or Apple´s past history.
Apple is delivering extraordinarily well, and there is still room from a valuation point of view if you are a long term investor who likes to crunch some numbers before making a decision. This company is hot, but you are not late too to the party.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, and Google. Motley Fool newsletter services recommend Apple, eBay, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.