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The Case to Buy Apple in 7 Charts

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

Over the weekend, I was very impressed with Foolish writer Don Dzombak’s graphic article ‘The U.S. Natural Gas Story in 15 Charts’.

Being the anti-fanboy I am, I set out to do the same thing and illustrate the case against Apple (NASDAQ: AAPL). It failed miserably.

So in seven charts, I present the case to buy Apple.

The Bear Thesis

Apple represents a textbook case of the S-curve. The company introduces a successful new product (iPhone, iPad), sales surge exponentially and the P/E multiple expands. All of this results in wild stock price appreciation.

But all good things end. Eventually the market is saturated, new competitors pressure margins and unit prices fall. Profits stabilize or begin to decline.

Apple’s EPS results reflect a classic S-curve.

<img src="/media/images/user_14324/1_large.png" />

New competitors are entering Apple’s market. Google’s (NASDAQ: GOOG) Android operating system has been a big success and continues to take market share. The company is also releasing its Nexus 7 tablet. Microsoft (NASDAQ: MSFT) is making inroads with their Surface tablet and smartphone business. Research in Motion (NASDAQ: BBRY) is also on the verge of a comeback with their new BB10 operating system. All of these new competitive threats are beginning to squeeze Apple’s margins.

 

<img src="/media/images/user_14324/2_large.png" />

Momentum stocks are valued based on the growth rate of earnings. The faster the company grows, the higher the P/E multiple investors can justify paying for the stock.

Apple’s profit growth rate has been steadily declining over the past three years. As a result, investors are paying lower multiples for Apple’s earnings.

 

<img src="/media/images/user_14324/3_large.png" />

In summary, slower earnings growth, declining margins and multiple compression will result a declining stock price.

Now watch as my bear thesis is destroyed.

The Next Growth Cycle

The Apple story isn’t finished yet. Looking further out, we begin to see Apple’s earnings reaccelerate as the tablet market really begins hitting its stride and the possible release of the iTV.

 

<img src="/media/images/user_14324/4_large.png" />

That’s nice and dandy, but those projections hinge on Apple successfully launching new technologies and jumping onto the next S-curve. Not very many companies have encores in the technology business.

Bazam!

<img src="/media/images/user_14324/5_large.png" />
 

The chart above represents Apple’s trailing twelve month revenues since the release of the iPod in 2003. As we can clearly see, Apple is better at surfing the S-wave than Kelly Slater. While history is no guarantee of success, I definitely wouldn’t want to bet against Apple as they enter their next growth cycle.

And just when I thought my bear case was finished…

Rock Bottom Valuation

Apple is trading at a remarkably low 11.8x earnings. I decided to do a quick comparables to see how cheap Apple really was.

 

<img src="/media/images/user_14324/61_large.png" />

Of course, there are no direct comparables to Apple. The company earns more than eBay, Facebook, Amazon and Yahoo combined! Apple dominates the PC, tablet and smartphone market. No other company operates as successfully as Apple in any of these spaces.

The best I could do was value Apple against a basket of stodgy, large cap, U.S.tech stocks; Google, Microsoft, Intel (NASDAQ: INTC) and IBM. The basket trades at an average 15x earnings. A 15x earnings multiple seems pretty reasonable given that Apple has better growth prospects than most of the names on that list.

 

<img src="/media/images/user_14324/7_large.png" />

Several Catalysts

Of course, you need some sort of a catalyst to justify a higher multiple. Apple has several:

Year-End: Many Apple shareholders, sitting on big capital gains, are selling their shares to avoid higher taxes in 2013. This selling pressure will end in the New Year and create a new source of buyers as these ex-shareholders repurchase their stock.

Dividend/Buyback: Apple is sitting on $117 billion in cash representing almost $125/share. A dividend hike, increased buyback or leveraged recap would result in some sort of stock price pop.

Earnings Reacceleration: EPS will reaccelerate as the company enters its next growth cycle in 2014. The bar is set very low and the stock is stacked up against some pretty favorable comps. Earnings acceleration is the ultimate source multiple expansion.

Foolish Bottom Line

Despite the 20% share price drop, Apple still represents a pretty attractive investment.

Even if you discount the compelling growth story, you’re buying an exceptional company at 9x earnings if you back out the cash. Unless we see a complete collapse of the business (which is a real possibly in the technology space), Apple is incredibly cheap.

Source: All data for graphics provided by YCharts.com.


RobertBaillieul has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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