Saturday, September 1, 2012

Great investments : $AAPL


This post will explain why we still like $AAPL following our post from may 19th when we recommended a buy for the stock at around 530$.

Apple may appear to be overvalued, however, if you look closely at the fundamentals, you will realize that it is not. In fact, with the current growth it is experiencing (50-75% a year), we find that it is slightly undervalued based on what we see of Apple right now and in the future. We are not saying it can maintain the same level of growth as in the past. However, the market is pricing $AAPL like it will only grow about 10-15% a year, which we find to be really conservative.

Apple will be making incredible new products in the future, whether its the Ipad mini, the iTv or something else. This means the company has a lot of room to grow, even though the general consensus is that they've already reached their limit given their size. The fact is there are still a lot of unexploited markets for Apple, some countries still have blackberries as their top smartphone usage. This will change, it's only a matter of time if Apple continues making a better and better Iphone.

The risks for Apple include competition, product cannibalization and reputation loss. For now, Samsung and Google are serious competitors in the smartphone and tablet markets. Other will try to join the race for a place at the top: Microsoft, RIM, Amazon, etc. Why do we believe Apple will continue to dominate?

First of all, they have the patents, which may not appear as an advantage, but this means that they came up with the ideas first. In the technology world, this is really important, as they are generally the ones who come out on top. With Steve Jobs allegedly leaving behind a 5-year plan for new products, it is safe to say that Apple will continue being a top innovative company. Also, as we have seen recently, their patents have the power to block the sales of some of the competition's products, like the Galaxy Tab from Samsung.

Second, Android have had a lot of problems with malware, bugs, which Apple rarely come across. This plays a major role in their reputation towards consumers, which Apple greatly benefits from.

Third, there is no doubt that the new Nexus 7 and Surface will have an effect on the Ipad's sales and pricing. The Ipad mini will provide for a cheaper alternative, however it will reduce the sales of the big Ipad's. Tablets seem to be falling in prices so rapidly, so the risk is that the Ipad's profit margin decreases significantly. However, we believe the innovation brought by Apple will be able to justify for the same pricing for new models in the coming years. If not, it will certainly make up for it with the volume of sales.

For us, it is a long term buy (3-5 years), but it definitively is not one to hold forever. Even for a short term play, we believe $AAPL is a good buy as their earnings keep growing year after year much faster that the analysts are expecting.

Debt = 0$
Forward P/E= 14
Growth = 50%-75% a year
ROE of 40%
Price target: 800$

Update: July 25th 2012

$AAPL is off its recent highs and settled at 570$ today as resulting from the "miss" in their recent quarterly report. We think this is a buying opportunity, as the report was actually all positive news, only that it was below expectations. The important thing is that their revenues are growing in every segment. The next two quarters should be massive for $AAPL, as they will release their new iPhone, reportedly the iPad Mini, and maybe even the iTV that will surely stir up holiday sales that will blow expectations.

Update: September 1st 2012

As expected, $AAPL is now moving up before the announcement of the new iPhone. The stock recently hit an all-time high of 668$. We think it is still a hold as new products will hit the market real soon and should increase their sales drastically.

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