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Apple Stock Has Discovered Gravity – But Don’t Sell

Well, all that talk about Apple (NASDAQ:AAPL) stock surging to four figures seems a little silly now … doesn’t it?

There are a few megabulls hanging onto hopes of $1,000 or more for Apple stock — I’m talking about these guys, one with a $1,650 target by 2015 and one with a cutesy $1,111 estimate — but most of us are more circumspect.

Here’s a short list of some of the things that have been weighing on Apple as it has slumped almost 20% in roughly a month’s time:

It sure looks like Apple has discovered gravity, doesn’t it?

Even so, while stratospheric growth appears out of the question, I’m not prepared to sell my personal stake in Apple just yet. By my read, despite short-term volatility, there’s a very good chance AAPL could get back to $700 or higher in the next year based on its historic valuation levels.

And a 20% gain is nothing to sneeze at.

So, I’m holding on to my Apple stock. And while I don’t think putting new money into Apple stock is incredibly wise right now, here’s why I think Apple is a hold — not a sell.

Recent Miss NOT a Demand Problem

A guide down for the current quarter coincides with a slew of new products, including the iPhone 5, new iPods, a flashy 15-inch MacBook Pro, the Apple Mini, a revamped flagship iPad, a new Mac Mini and redesigned iMac. Consider this WSJ article from September about iPhone 5 supply issues, and you’ll see this bottleneck is not necessarily a surprise.

Most Apple bears talk about a critical mass for the iPhone as better, cheaper alternatives emerge, yet it’s encouraging to see signs that this is a problem of supply, not demand.

The risk, of course, is that the bear case on demand will prove true eventually. But in the short-term, that doesn’t appear to be the case.

Valuation Is Reasonable Short-Term, Cheap Long-Term

Ready for some math?

Apple stock has a forward price-to-earnings ratio of less than 12.5 right now, based on about $585 per share in current pricing and 2013 EPS forecasts of about $47, according to Standard & Poor’s data. Not a screaming bargain, but hardly overbought.

But assuming 2014 earnings forecasts hold at $56, a P/E of 12.5 on that figure gets you to $700, right on the nose.

In other words, if the forecast doesn’t change and the valuation remains constant, you’re looking at about 20% upside for Apple stock from current pricing.

Dividend

Let’s not forget that Apple stock also pays a dividend. Right now, AAPL shares yield about 1.8% based on a $10.60 annual rate. Not huge, but certainly a nice sweetener –– especially for those of us with a cost basis significantly lower than current pricing.

The current payout ratio is 24% based on $44.15 in FY 2012 earnings, so the dividend is not just sustainable, but ripe for increases in the coming years as earnings rise. Consider that a 24% payout on $56 a share would net $13.44 in annual dividends, or a nearly 27% increase in payout! That’s a year or two down the road, mind you, but not insignificant when plotting long-term potential.

Cash King

Enough complicated math. Here’s a simple figure with no calculations: $121.25 billion.

That’s the size of Apple’s cash hoard!

Even if you back out the foreign cash, there’s still $54.3 billion on the books at Apple — enough to buy both Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL), with $10 billion left over for a hell of a buyout party.

Check out the screenshot from Apple’s 10-K if you think I’m making these figures up.

On the Other Hand …

All this said, I still have some serious concerns beyond the technicals and the earnings trouble.

China: Tim Cook was quick to point out in the recent earnings call that iPad sales were up 45% in China, and the iPhone was up 38%. That’s great … but China is far from reliable, as we’ve seen with auto sales, among other big-ticket consumer items. Furthermore, I remain a bit troubled at how little market share Apple has scrounged up in China for its iPhone, thanks in part to a lack of telecom subsidies like the ones Verizon (NYSE:VZ) and AT&T (NYSE:T) provide so willingly in the U.S.

Cannibalizing Sales: There also is the risk of cannibalizing sales. Logically, you have to wonder how Macbooks are going to fare in the age of tablets — and even how iPad sales will fare now that the iPad Mini is out at a lower price point. Apple has managed to successfully disrupt itself in the past — the decline of the iPod amid the rise of the iPhone, for instance — but this time it might feel the pain on margins. For instance, CFO Peter Oppenheimer put gross margins at the Mini “significantly below” other products.

First-Mover Power Fading: Though fanboys won’t admit it, there’s the real risk of disruption from a new generation of slick Google (NASDAQ:GOOG) Nexus tablets and the enterprise potential of the Microsoft (NASDAQ:MSFT) Surface tablet. Apple created a new product category with its iPhone and iPad … but hey, Research In Motion (NASDAQ:RIMM) and its BlackBerry were once synonymous with on-the-go email. How’s that working out lately?

So needless to say, I’m optimistic, but I’m also cautious. I’m sticking with Apple but, again, new money should probably sit this one out.

I have a cost basis of around $510 for my shares and am letting it ride. But if you have shares at a lower price point, it might be prudent to take partial profits, particularly if Apple stock remains an overweight position in your portfolio.

And if I’m proven right? The next time it hits $700, I’m likely heading for the hills.

Take that to the bank.

Related Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple.

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Comments
  • TeeJay2000

    Come on. iPhone 5 is only now certified in China. That will be huge. Margins are always lower to start on any Apple product. iPad mini will add, not decrease, bottom line. Surface? Have you read any reviews? It has a good chance of entering Zunedom. AAPL 750+ is likely.

  • http://pulse.yahoo.com/_SBTPNLEL54D6SSI3LGAVMKU7NU PETER S

    A lot of speculations…apple may really be shrinking in popularity with users hence sales are disappointing and will continue to spiral, or it may be apple strategy to lower the stock price and buy back a hefty bundle of their stocks, or positioning themselves to file a glowing report in the next quarter where they will show significant sales and earnings increases over the previous, or Buffet and other billionaires knows something and getting ready to buy apple shares after dumping a good size of their own stocks, or all of the above and more, or the world is ending….but the apple company and apple stock is a PAPER TIGER regardless of their cash position, no cash is enough to buy customer loyalty with stagnant products like the current apple devices.

  • http://www.facebook.com/profile.php?id=10129671 Adam Weibling

    So much negative press about this company with such a low valuation is very strange. YES, I SAID LOW! Who are all these trolls who hate anyone who says good things about Apple, arguably the most successful tech company ever with lots of satisfied customers?? It is downright bizarre. Let me show you something…

    Does anyone else realize that Apple is trading at roughly half Google? Let me show you my rationale, which I call “Apples to Googles”

    The dividend is roughly 1.8 percent. Google is trading at 21x earnings, so 21 x 1.8 = 37.8%. That is the percentage of the stock price Apples dividend will net you back in that same time period.

    Taking 62.2% of Apple’s price – .622 x $583 = $362.63, once you subtract valuation of dividends over the same period. An effective price minus dividends assuming they never go up (ha) of 362.63.

    Subtracting dividends from earnings to keep it fair, otherwise you would be double counting that revenue, artificially making this calculation look even more in favor of apple. With that in mind 44.16 – 10.60 = $33.56. That would be the current eps minus the dividends which I built into the stock price by discounting it by net gain to shareholders over 21 years in my first calculation.

    The effective price per share over the period of goodles valuation which is currently 21.4 years can now be given $362.63 / $33.56 = 10.8 p/e.

    That means when you take into consideration the dividend on a similar timeline (Apples to Googles), Apple trades at 10.8 p/e ratio to googles 21.4.

    This gives Google a 1.98x valuation to Apple. The only problem is that Apple is growing MUCH MUCH faster then Google… Alarm bells, questions, anyone else or just me?

    • http://twitter.com/JeffReevesIP Jeff Reeves

      Adam, fair warning I am COMPLETELY stealing your Apples to Googles thing. I differ slightly with some of your math but the concept I think is instructive… and entertaining. Thanks so much for the post!

  • KarlTiggs

    Comparing Apple’s products to its competitors is silly. Consider that the Apple II was priced well over $2000 in 1980s money and it managed to out live its competitors such as the Atari and Commodore which sold for under $300. The Macintosh is essentially the reincarnation of the Apple II selling for several times the cost of a low end PC.

    Microsoft, Google and Amazon just don’t get it. They are all missing the secret sauce. Microsoft is too late in the game and doesn’t offer anything that makes up for lost time. Google makes a bland, unimaginative product. Amazon is essentially a single function product going the way of the Blackberry.

    The iPad Mini is the final nuke to be dropped on its competitors. If you can’t afford a Macintosh, iPhone or the full iPad, it is an affordable alternative that gets you through the door. Sure, it is more expensive than the competitors, but for most, the pricing is seen as merely as a small up-charge for an Apple experience.

  • Hercules Rockefeller

    What an extremely ignorant and irresponsible article. If you held on to your AAPL at the time this article was written you lost big time. There are so many better opportunities and better stocks to invest your moneyin that I just can’t understand why anyone would keep this terrible stock. It has to be because people love Apple and refuse to believe it’s just another stock. FORGET APPLE don’t let what happend to AAPL sour you on the stock marcket. There are many great opportunities to make money right now, but you can’t hold on to these stocks forever and expect it to always go up.