Despite the large market cap on Apple (NASDAQ: AAPL) stock, the firm’s massive earnings power allows the stock price to continue moving higher. This year Apple plans to launch heavily anticipated devices such as the iPad 3 and the iPhone 5, both of which are exciting new devices which continue to push the limits of technology and innovation. In terms of Apple’s financial status, the company holds almost $100 billion of cash in the bank and is looking closely at the best way to deliver value to shareholders with that cash. Investors say that the large cash position has been holding back the share price, as the return on cash is clearly much lower than the return investors can achieve if they received that cash in their pockets.
Despite all the positives for the company, there are still naysayers and pundits that continue to spread negative rumours and bash Apple. However, the demand for Apple products is so great that it would be on the conservative side to say that Apple could earn over $50 per share this year. That is a 42% increase over last year’s earnings, demonstrating Apple’s extreme earnings power and growth prospects. However the company gets grouped in with other technology firms such as Microsoft for example, which trades at 11.38 times earnings. If Apple earned $50 per share this year and traded at the same ratio as Microsoft, the company would be worth $569 per share – still much higher than its current $514 stock price. But why should Apple stock trade at 11.38 times earnings, when the company is growing at 42% this year? Investors keep trying to call the top in the stock and they believe that this string growth rate is unsustainable. The truth of the matter is, that iPhone and iPad demand continues to increase each year as the company continues to come out with revolutionary products and features. iPad is a new market segment for Apple which has barely even started to take off, and investors are already quick to call a top in sales. Furthermore the company has hinted that it will be entering the home entertainment business, which unlocks an entire new market for Apple to make its mark. On top of that, Apple has an interesting way of making its devices highly compatible with each other, especially with the new iCloud features that have just recently been launched. This means that iPhone and iPad owners will likely want to purchase MacBooks and Mac Pros so that all of their devices can sync together. Apple still only has 10% of the PC market, which is growing due to the halo effect of its devices.
Coming back to the company’s valuation, it is clear that with Apple’s incredible earnings power and powerful growth, that 11 times earnings values the stock too cheaply at the extreme level. Perhaps with a 42% growth rate, Apple should be valued in the Google camp, as Google trades at just over 20 times earnings, despite the fact that Apple is growing earnings much faster than Google. Of course if the price-to-earnings ratio remains significantly lower than the growth rate for too long, the earnings outpace the increase in stock price, leading to extremely inexpensive valuations. So if Apple received the same 20 price-to-earnings multiple that Google currently holds and Apple earned $50 per share this year, the stock would trade at $1000 per share. While this amount seems out of reach, it is clear that Apple has the earnings power to support this valuation with ease. As Apple’s PE ratio still remains far below its growth rate, Apple stock will continue playing catch-up, though the stock also remains cheap relative to its peers.
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