Apple looks pretty cheap
It’s been a couple days since what has now been a widely panned dud of a keynote speech by Steve Jobs at Macworld. No “one more thing … ” No breathtaking surprises. No stunning celebrity. (Randy Newman? Come on.)
I was in the audience, and I thought the lower-key keynote was just fine. It’s true that Jobs blew no one away. Top honchos from Twentieth Century Fox and Intel (CEO) won’t wow the crowd. Movie rentals can’t compare with the reinvention of an industry. And while Apple’s (AAPL) new ultrathin notebook looks fabulous, it’s not priced for the mass market. (And will people pay $1800 and up for a device with no Ethernet port? These are the types of topics geeks can endlessly debate.)
But so what? After a year like Apple had last year, it’d be silly to try to blow people away at Macworld. Perhaps it was better to lower expectations. I’m guessing that whether intentionally or not, that’s what Jobs did on Tuesday. And for what it’s worth, while Randy Newman isn’t as sexy as John Mayer or Kanye West, past Macworld performers, his two songs were really good.
The faithful’s disappointment had nothing on Wall Street’s, though. Apple’s shares have now fallen $19, or almost 11%, since Monday’s closing price. This will seem confusing to market watchers of the amateur variety as well as the pros. No one has answers, only guesses. Citi analyst Richard Gardner, for example, called Tuesday’s stock behavior a “typical seasonal pullback.” His explication covers all the bases:
While we are surprised by the magnitude of today’s pullback in Apple shares following an as-expected Macworld keynote, we believe the reaction reflects the view that today’s product announcements will do little to help Apple during [the first half of calendar-year 2008]. The products either represent minor enhancements to existing products (i.e., software updates for iPhone and iPod touch), niche products (i.e., the new ultraportable MacBook Air) or new services that will drive iPod and AppleTV sales over the long-term but contribute little or nothing to operating income during 2008 (i.e., iTunes movie rentals).
Trying to understand the selloff almost isn’t worth the effort. Apple is one of those stocks that defies explanation. It was equally tough to understand is recent high of almost $203.
So focus instead on how the company is valued. At $160 a share, Apple trades for about 31 times expected earnings for its year that ends in September. Analysts expect Apple to grow earnings this year about 31%, an astounding growth rate for a company this size. Next year they see 25% growth. In other words, at its current multiple, Apple is getting little or no premium to the market, despite the iPhone working out to be a bigger than expected seller and the Macintosh picking up speed. (Google (GOOG), by the way, at $616, is off 18% from its high. It trades for about 30 times expected 2008 earnings and is expected to grow by 33% … I’m just saying … )
Apple reports earnings next week. It has a habit of underpromising and overdelivering. It isn’t the expensive stock it used to be.
There are two key stories with Apple that don’t get enough attention. The first is the monthly fee they receive from AT&T per subscriber. We don’t know how much it is (Gene Munster of Piper Jaffray thinks it’s $18/subscriber/month), but this is pure profit, and will grow nicely along with the number of subscribers.
More importantly is the revenue deferral for all iPhone and AppleTV sales, over the subsequent 8 quarters. Last quarter the deferred revenue was a whopping $636M, on approx 1.1M iPhone sales. We already know they sold at least 2.2M in their Q108. This artificially reduces current earning, and thus leads to a likewise artificially inflated P/E.
Apple is cheap here.
This article is cheap.
-Sunny Delight
Cheap as compared to what? Generic comments like “cheap” don’t add up to much in my book. At it’s current price ($161), it’s a “buy”.
There was an story in the WSJ regarding people paying $2000 (by Lee Gomes) for gold plated speaker cables. Buying a $1800 laptop has nothing to do with functionality and features. I don’t need another company but I will buy another computer. (Actually several). Ethernet port? There is/will be a usb to ethernet converter.
I placed an order for a Macbook Air the only difficult decision was deciding on the solid state memory drive vs. hard drive.
Even at 30 times earnings as opposed to 40 times earnings a few weeks ago this stock is overvalued. We are in the early stages of a recession and this company sells high end consumer electronics. It is not totally unwarranted to be a little skeptical of any “value” in this stock. I like the products but think looking at current earnings this stock is over valed. Future earnings will be hampered by poor economy and many of it’s products reaching a saturation point.
…and how does one predict “future” anything??? Apple’s core cash flows have always been reliably solid because they innovate…not copy…or follow. As usual, the financial markets misquote, and exhibit a narrow understanding of technology impact…like comparing the new Apple Air “NOTEBOOK” (bold for those just mentioned) with “full-sized” LAPTOP machines. Let’s not forget the rants about why “IT will never accept the iPhone”…a CONSUMER PRODUCT. If you have to stretch to find something wrong with a company that consistently exceeds fundamentals expetations, then perhaps, you shouldn’t buy the stock…leave it for us obvious losers (this one bought at $35)…but, hey I guess the smart ones “intrinsically” know that.
The general media spin surrounding the Macworld keynote as being lackluster is laughable.
How soon the media forgets. Prior to the 2007 Macworld event the iPhone was already an expected announcement. Its concept, before, during, and after 2007 Macworld was surrounded by bashing the phone. Not enough battery life, screen that scratches, touch will never be accepted, on and on. Steve Ballmer stated flat out it would be a flop.
The stock was on fire because of Apple’s growth in its overall product line throughout 2007, this growth will continue, and while pundits may think this new thin lap top is a non event, neither was the iPhone in 2007.
Wow… I would hate to be a journalist. You get bashed from both sides.
First and foremost Apple was overpriced. Its price reflected Apple’s performance being flawless and no risk was priced into the stock. Now the fact is we’re headed towards a downturn in the economy where not everyone is willing to spend an extra couple hundred bucks on something cause its made by Apple and cool. Trying to bring in Google’s obscene valuation as evidence was pretty pathetic. Terrible article.
It is easy to understand the high prices recently held by these tech stocks. Speculation. Not unlike realestate. These stock prices need to do just like realestate is doing now. Correct to more reasonable valuations. aapl and others have got more to go down to get there
It is pretty darn cheap. Like Steve J said, you take care of the top line(technology, customer satisfaction etc) and bottom line will take care of itself.
An article like this owes to its readers to establish an intrinsic value for the company it discusses. It isn’t helpful to compare Apple’s multiple to other companies without establishing whether *those* companies are over or undervalued, so you might as well leave that alone and focus on the topic at hand.
What are Apple’s future cash flows worth? Isn’t that what you should be focusing on if you want to convey that the stock price is cheap?
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Apple makes overpriced, underperforming equipment.I hope their stock crashes to $3 a share.