The is a Guest Post from:
Apple (AAPL) Bull vs Bear Debate
From the October 2007 StraightStocks Monthly Market Guide
Bullish Case
By Chad Brand, author of The Peridot Capitalist
Have you ever wondered why on earth people pay $4 for a cup of coffee at Starbucks when you can get the same cup elsewhere for a fraction of the cost? Loyal Starbucks drinkers will tell you the coffee is far superior, but most objective minds point out that competing coffee isn’t that different. It turns out consumers are willing to pay more for a product that gives them the feeling of status and an affordable luxury.
I bring this up because Apple seems to have the same type of thing going on with its loyal customer base. Macintosh computers have long been much more expensive than their PC counterparts, and it’s not like they are flying past the competition in terms of speed or memory or hard drive space. The same can be said for Apple’s mp3 players and the recently released iPhone. People are willing to pay a premium for the brand and for what it represents.
Apple stock has been soaring in recent months on the heels of the iPhone release and a new revamped set of iPod music players that are just hitting store shelves. The shares have hit $150 on the hope that the iPhone takes worldwide market share in cell phones, the iPod will not be cannibalized too much with Apple’s phone product, and that Mac sales are driven higher from the new generation of loyal Apple users that have been enticed so far this decade.
Bears on the stock will usually point to the valuation as reason to stay away from Apple shares. At more than $150 each, they do trade at a lofty P/E multiple of 44 times. However, investors should look into the future at 2008 to value the company and with an estimated revenue growth rate of 25 percent next year, a reasonable PEG ratio (P/E relative to growth rate) of 1.5 can justify a P/E as high as 37.5 for Apple shares.
Current earnings projections for calendar 2008 stand at $4.59 per share. However, the great thing about a company that can charge a premium for its products due to a loyal customer base is that you can set prices accordingly and earn much higher margins than your competitors. Apple consistently beats earnings estimates because people often underestimate their pricing power, which results in higher than expected margins.
As a result, it is not unrealistic to think Apple could earn $5 per share in 2008, as the iPhone goes on sales internationally, music buffs upgrade to the new set of iPods, and the iMac computer line continues to steal consumer market share in the personal computer market from the likes of Dell and Hewlett Packard.
If you consider the scenarios outlined below, it is not unreasonable to expect Apple stock to continue its ascent, albeit as a much slower pace than in previous years.
Bearish Case
By Todd Sullivan, author of ValuePlays
Valuation:
Currently Apple shares trade at $156 a share or 44 times 2007 earnings and 30 times 2008 estimated earnings. When you have the likelihood of an economic slowdown on the horizon, buying shares in a company with such a lofty valuation is a risky bet at best. Apple is also putting up a headwind into EPS growth by diluting shares. Since 2004, the number of shares outstanding has increased 10% and that has a direct offset to EPS. At this valuation, Apple needs to grow earnings 50% a year minimum to justify its frothy P/E. Put simply, in 2008 Apple needs to grow total earnings almost $1.8 billion which is equal to its total earnings for 2005. A tall order.
Public Relations:
After years of building goodwill, Apple has turned into Microsoft overnight. First the $200 price cut on the overpriced and slow selling iPhone angered early buyers and then Apple’s $100 rebate appeasement seemed to only anger many more.
Apple trumped that when it began disabling iPhones that had been hacked or had 3rd party software added to them. Expect lawsuits to begin filtering in as it looks like Apple violated the law when they intentionally broke phones they no longer owned.
In a course of a few weeks Apple has gone from lovable underdog to corporate bully. This is never a good thing for a company that built its reputation on being the former.
Steve Jobs Backdating:
Steve Jobs is Apple, period. Should this backdating issue rear its head (it is as Jobs has been subpoenaed in another Apple case) and Jobs becomes entangled in it, Apple will suffer. It will suffer if for no other reason than its spiritual as well as functional leader will be distracted and possibly in trouble. A Jobs-less Apple will flounder (history proves this). This is a distinct problem of having one person responsible for your future, If Jobs sneezes, Apple gets the flu.
Sales:
iPod sales have been falling off the cliff the last two years and to date, iPhone sales will come in far short of Jobs’ 10 million unit goal. Mac sales have blossomed but Apple’s core is the music business. But now Wal-Mart and Amazon are getting intensely into the download game at prices that are cheaper than Apple. The price cut on the iPhone will also cut heavily into profits. Will any one of these events “derail” Apple? No. But let’s remember what kind of growth we need to justify the current price. Profits will be plentiful at Apple but those plentiful profits need to grow at an astonishing rate to justify the price people are paying now.
When you add these up, Apple has a stiff challenge to keep shares from collapsing. Apple will increase profits and Apple will make money, it is just that its share price will fall as the expectations far outweigh the company’s ability to reach them in the current environment.
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Some material may be dated as the recent pop in AAPL has sent shares over $180 per share. By the way, MarketMatador.com is absolutely BULLISH!
(1 votes, average: 4 out of 5)
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