Apple: 'If Only It Were Cheaper'
Frank is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I'm talking to friends and fellow investors the conversation almost always seems to turn to Apple (NASDAQ: AAPL). Apple is, by far, the most covered stock - and why not? It's the largest company in the world and virtually everyone, it seems, owns at least one Apple device. Many of these friends and investors don't own any Apple stock, yet they still want to talk about it. Until just last month, when asked why they don't buy Apple shares, most replied that it was simply too expensive. If they did own shares they only wanted to add to the position if Apple's share price pulled back.
Let's ignore the fact that Apple hasn't been "expensive" for a long time. Apple hit a 52 week high of $644 on April 10, 2012. Since then shares have fallen more than 12% to $565.25. At its high, Apple traded for 13.76 times estimated 2012 earnings. That ratio has now fallen to 12.08. Yet still, my investing friends aren't buying Apple. Fear has taken over. "What if Apple falls more?" Given that it's nearly impossible to time the bottom of a stock, it could. That still shouldn't engender such fearful emotions. Allow me the attempt to instill some confidence.
In 2009, Apple earned $9.08 per share. It traded at approximately 23 times earnings. In 2010, Apple earned $15.15 per share. It traded at approximately 21 times earnings. In 2011, Apple earned $27.68 per share. It traded at less than 15 times earnings. As I stated before, Apple is currently trading at 12 times 2012 estimated earnings. Those estimates are likely to be too low, meaning Apple is probably trading for an even lower multiple. At these prices Apple's stock is cheaper than it has been in years. The stock price has not kept up with Apple's stellar earnings growth. The story would be different if shares were cheap for a reason, such as deteriorating earnings. However, the only reason seems to be fear.
Apple can continue to post solid earnings gains. The rate of growth will eventually slow, but earnings will remain strong. The company blew most analysts, who were predicting a slowdown in iPhone sales, away when they reported second quarter earnings. Apple sold 35.1 million iPhones in the quarter. In addition, Apple sold 11.8 million iPads and 4 million Macs. The iPod is no dud either, even though it is largely being replaced by the iPhone. Apple sold 7.7 million of those in the quarter. All of these connected devices are also driving revenue and earnings at the iTunes store. iTunes generated almost $1.9 billion in revenue for the quarter. Apple's ecosystem model generates additional earnings beyond simply selling devices.
Apple has barely scratched the surface in China. The company began selling the iPhone on China Telecom's network in March and hasn't even started selling the iPhone on China's largest carrier's network. In the latest quarter, Apple sold 26.1 million iPhones outside the United States. That's a huge number but it's likely just the beginning.
This is only the potential for Apple's existing product lineup. Apple will likely introduce a new iPhone later this year and may introduce a television. Time will tell if Apple can turn the TV and cable industry upside down like it did the music and mobile phone industries. In addition, it appears that the Mac lineup will be refreshed this fall. All of these new products should make for a very nice holiday shopping season.
Apple's stock has taken a well-deserved breather after a big run since the beginning of the year. The stock is now cheaper than it has been in years, and investors are getting a nice buying opportunity. Apple's growth potential remains tremendous. As iPhone sales begin to slow in the United States it appears they are just heating up in China. With new products on the horizon, Apple is likely to earn much more than analyst's expectations this year. The company's newly instituted dividend is just icing on the cake. Trying to time the bottom is likely a fool's game (and not the good kind of Fool). So when you're talking to your investing friends, tell them it's probably ok to go ahead and take a bite out of Apple.
fjconstantino owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.