Apple Inc. (NASDAQ: AAPL) stock is down 54% from its December 2007 high of $200 a share. We know the economy is in rough shape and consumers are cutting back. But by one measure, Apple stock is a bargain. Should you buy it?
Apple trades at a Price/Earnings to Growth (PEG) ratio of 0.75 (based on a P/E of 17.7 on earnings growth of 23.7% to $6.52 in FYE ending September 2010). A PEG value less than one is considered an attractive price. So it looks cheap to me -- but only if you believe that earnings forecast. And economic woes mean it's likely that the numbers will be lower.
If Steve Jobs remains in the CEO position for the next several years, it is reasonable to expect more ground-breaking innovations from Apple. But one short seller is betting that the benefit of any innovations will be offset by the fact that in a weak economy, people will spend less on Apple's products, resulting in weaker Mac sales. And he does not see Apple investing in new products like the iPhone.
The bullish case for Apple is that this short seller is over-estimating how much Apple's earnings forecast will be reduced by the economic slowdown.
Where do you stand?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Apple securities.
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Reader Comments (Page 1 of 1)
11-12-2008 @ 1:59PM
Tam said...
Apple will do well, and continue to do well, even with the 'economic slowdown'. The iPhone is selling outside of the US and doing well.
But I;m not sure the stock will go anywhere soon (except maybe down, again) - the current share climate seems to be entirely free from traditional considerations such as P/E, cash on hand, revenues or even profits. Just wait for the next speculation on cutting back iPhone production or rumours of Steve's ill health and then stock will crumble, once again.
Even their last quarterly results (which were fantastic) didn't bouy the stock - in fact the gains on the same day were due to other rumours entirely, IIRC.
11-12-2008 @ 7:07PM
kenc29 said...
People have been talking down Apple due to macro conditions since January. Since then, their sales have not shown one iota of any macro effects, as Apple continues to break sales records. I mean, shorts have ruled the day, by driving down the price of the stock, but the cause, weak earnings, have not yet appeared after 3 full quarters. How long do we have to wait for this macro effect to take place?
11-13-2008 @ 8:43AM
Tom B said...
AAPL a bargain? They'll beat MSFT on market cap by this time next year, IMHO.