Apple Investors Crush the Market in 2012...What's Next?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) bears and shorts have proudly tooted their horns in the last few months as Apple's stock returned to conservative levels. But the faithful, buy-and-hold Apple investors were the true winners in 2012. Patience paid off as Apple investors more than tripled the Dow Jones Industrial's index, without incurring any transaction fees or capital gains tax. Furthermore, the gain from $400 to $515 was driven by solid fundamental performance. At $515 per share, the stock now trades at a conservative P/E below 12.

AAPL data by YCharts

Wonderful Companies at Fair Prices

Warren Buffett once said, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price" (click to tweet this quote). This is especially true for long-term buy-and-hold investors. Consider this: There is empirical evidence that low-turnover portfolios generally outperform high-turnover portfolios, and I can't think of any better way to keep portfolio turnover low than by investing in wonderful companies at fair prices.

Yet another testament to the benefits of Buffett's "wonderful company" mantra, Apple outperformed Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), Dell (NASDAQ: DELL), and Hewlett-Packard (NYSE: HPQ) in 2012. One year ago, Apple clearly fit the definition of a "wonderful company." The Apple ecosystem was as sticky as ever, with Apple's iOS and OS X winning repeat customers and new customers all over the world. New products were inevitable: iPads, iPods, iMacs, iPhones, Macbook Pros, Macbook Airs, and a rumored iPad Mini. Apple delivered on all of these expectations. Finally, Apple was trading at a conservative valuation with a P/E around 14.

Deja Vu?

As 2013 approaches, questions are looming. Can Apple continue to innovate? Was the Apple Maps fiasco the beginning of a tail spin, or was it a lesson learned that will help Apple move forward in 2013?

Here is what we do know. Apple is as profitable as ever. In fact, the company is a cash cow. It's raking in 27 cents of free cash flow on every dollar of sales. With no long-term debt to service, Apple can use this free cash flow for reinvestment, sensible acquisitions, share repurchase programs, and dividends.

With each new product launch, Apple continues to break past sales records (with the exception of the iPod as new products cannibalize sales). Apple will refresh many products in 2013. Some of the most probable refreshes include:

  • iPad
  • iPad Mini
  • iPhone

No doubt Apple will continue with its usual annual refresh of iOS and OS X. Other likely refreshes (assuming Apple continues with traditional refresh cycles) include the Macbook Pro, Macbook Air, iMac, and iPod. Then, of course, there is the rumored Apple television.

Despite competition from Android, Apple has not only overtaken Android in market share in the U.S., but Apple's iOS market share is up sharply, from 35% to 53%. Android's market share, on the other hand, is down from 52% to 41%. This is very impressive, considering the fact that Google hands out its software for free to a variety of smartphones and Apple's iOS is only available on the single iPhone product line.

Given Apple's momentum and likely another year of many new products, investors should expect some top and bottom line growth; somewhere between 15 to 25% seems reasonable. At today's price for Apple shares, the free cash flow (FCF) growth rate assumed by the market is approximately 15.8%. Analysts are forecasting growth in the ballpark of 20%. In other words, with an assumed FCF growth rate of 15.8% and consensus estimates of 20% growth, Apple is priced conservatively.

Going into 2013, Apple trades at just 8.4 times forward earnings estimates, in line with Microsoft's 8.2 and far more conservative than Google's 16.3. Of course Apple trades at a premium to struggling tech companies like HP and Dell, which trade at forward earnings ratios of 3.8 and 5.9, respectively.

Cheaper than Google and in line with Microsoft, yet far more expensive than HP and Dell, investors can buy Apple at a fair price, considering Apple's momentum and the potential for further growth. If Buffett's "wonderful company" mantra holds true, buy-and-hold investors might want to consider buying Apple for another potentially market crushing year. Deja vu?

The Bottom Line

There is still room for upside in Apple's very conservative valuation. Even better, the stickiness associated with Apple's ecosystem and a very loyal customer base offer some downside protection, a very difficult trait to find in tech stocks. The recent sell-off presents an opportunity for long-term buy-and-hold investors to, yet again, buy (or continue holding) a wonderful company available at a great price. Apple could very well beat the market again in 2013.


DanielSparks owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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