Apple $1,000 Is Easier Than You Think
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The discussion is already going strong in financial circles: can Apple ) reach a price of $1,000? Is that a reasonable valuation target in the middle term, or a delusion only sustained by the most fanatic Apple investors? From a comparative valuation point of view, such a target may be much more reasonable than most people believe.
We are talking about a long stretch of more than 50% from the current area around $665, which is an ambitious target, especially considering that Apple is the biggest company in the world by market cap and big companies usually tend to be quite stable.
After the tremendous run up the company has had over the last ten years, it sounds like smart idea to apply some skepticism regarding future price increases. After all, history teaches us that too much optimism about a particular company can sometimes produce bubbly valuations with undesirable consequences for investors in the middle term.
On the other hand, there is no sign of unwarranted optimism regarding Apple and its current market valuation. Quite on the contrary -- the stock is much cheaper than other bellwethers in the tech sector.
The table below compares valuation ratios and growth figures for Apple versus Google ), Amazon ), eBay ) and Facebook ). In the last row we can see how Apple would compare under a $1,000 price assumption.
At current levels, Apple is cheaper than all of the companies in the table; it has the lowest P/E ratio and Price to Free Cash Flow ratio in the group. Furthermore, if we include growth expectations in the analysis, Apple has a much lower PEG ratio – P/E divided by growth estimates - than any of its peers.
Under an assumed price of $1,000, Apple would have a higher P/E than Google and Ebay, although only Google would be cheaper than Apple in terms of free cash flows. When we look at the PEG ratio in an “Apple 1000” scenario, Apple would still be cheaper than any of the companies in the table. Facebook and Amazon are notoriously more expensive than Apple, not only at current levels but also at a $1000 price.
Overall, the company looks quite cheap currently, and it wouldn’t be dramatically expensive at a $1000 level either. If Apple is able to achieve its growth expectations of 21% annually over the next five years, the stock would actually be cheaper than other alternatives in the sector in terms of its PEG ratio. The target growth rate is not easy, but Apple has a long trajectory of doing better than estimated by analysts.
The company will be launching many important products over the following months, and demand for those new items should provide some relevant information about growth potential over the next years. Besides, Apple has one the most valuable brands in the world, and that makes for a very strong competitive advantage when it comes to producing and sustaining profitability the long term.
If the iPhone 5 and the new iPad models are as well received as previous launches have been, Apple should have no problem at achieving higher growth rates than the 21% estimated by Wall Street analysts. Digital products, apps and the much expected Apple TV could be other sources of additional growth over the following years. There is certainly the potential for better than expected growth rates coming from such a successful company.
But even if it just matches expectations, Apple is quite cheap at current prices, and the company would not be too expensive at a $1,000 price level either. Based on a comparison with other high quality companies in the tech business, a price tag of $1,000 for Apple doesn´t seems an unreasonable idea at all.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, eBay, Facebook, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.