Dear Wall Street: Stop Making Me Buy Apple
John-Erik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I never intended for Apple (NASDAQ: AAPL) to make up such a big piece of my portfolio when I started picking up shares in early 2011. But it’s quickly grown to make up nearly a quarter of the weight of my overall holdings. And that’s in a portfolio of about 20 individual stocks.That’s going to make some of you cringe.
If you’re one of those folks, get ready to cringe a little more. Because it could well become an even bigger piece.
Why? Because Wall Street just hasn’t been willing to price this company appropriately. It’s been a bargain for years, and it still is, even at nearly $670 a share. That’s right. Apple just had a run up of nearly $100 a share, and it’s still on sale.
So if you're one of those many investors saying "I should have bought more Apple when it was at (fill in the lower price here)," stop wishing you had, and buy now. Because a year from now, some of you might be saying you wish you'd bought more at $670.
Apple never should have fallen to $570 after its last quarterly report, even if the company missed analysts’ expectations on on the quarter's profit and revenue.The numbers overall remain staggering, with earnings and revenue still growing at better than 20 percent over last year even with the slow iPhone sales for the quarter. Growth was particularly impressive for the iPad: 84 percent over last year.
No true peer
Maybe Wall Street can’t price this baby right because it just doesn’t have anything else to compare it to.
Apple boasts a 3-year revenue growth rate of 50 percent (annual average). Its 3-year earnings growth rate is 68 percent.
Apple is hanging those numbers as the biggest company in the world (measured by market cap).
They are the type of numbers that warrant a stock getting priced at an outrageous multiple -- something like Amazon’s (NASDAQ: AMZN) 292.8 price-to-earnings ratio.
Not only is Apple not fetching that kind of multiple, it's not even selling at a PE as high as slower-growth stalwarts like Procter & Gamble.
To put this into some perspective, let's have a look at Apple's growth and then another at how it's been priced during that time. We'll compare it to two other top tech names worthy of any investor's consideration: Google (NASDAQ: GOOG) and Amazon.
First, a look at revenue over the past five years.
AAPL Revenue data by YCharts
That's impressive growth for all three companies, but particularly Amazon and Apple. And especially Apple, which leaves even Amazon in the dust.
Now, let's take a look at how Wall Street has priced the three stocks, taking that growth into consideration.
AAPL PE Ratio data by YCharts
Wall Street has responded to Amazon's growth by pricing the stock at a great premium. That's usually what investors can expect.
But it's not what's happened with Apple. Despite growth even more impressive than Amazon, Wall Street has responded by marking the stock down.
That's why, even after a run-up like we've seen, I'm willing to say that Apple will continue to outperform the market. And to say it will do so by no small margin.
The fact that the company has been so freakishly successful is cause for skepticism, no doubt. It can't continue forever.
But where’s the evidence suggesting that Apple's growth is about to drop off a cliff? The company continues to score hits. See the iPod, iPhone, iPad and all their incarnations. How many failures were there? Expect the iPhone 5 to be the next hit.
Pricing Power
A sure sign of how strong a position Apple is in is its ability to set a premium price on its products and get it.
Compare iPad prices ($500 to $830) to the tablet computers being sold by other tech heavyweights like Sony, Samsung, and Amazon. Those start at less that $200. The iPad isn’t just marginally more expensive. It’s twice, even three times the price. Yet two of every three tablet devices sold is an iPad.
That's pricing power. And Apple has it with every product it sells. That says a lot about Apple's position in this industry. Until investors start to see otherwise, Apple is a growth story. A big growth story. And until it's priced as such, the stock remains a bargain. Buy more while it's still one sale. You'll regret it if you don't.
John-Erik Koslosky owns shares of Apple. He does not have any position in any of the other companies mentioned in the post. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, 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.
