AAPL at $60

[raz]

davester Wrote:
-------------------------------------------------------
> raz Wrote:
> --------------------------------------------------
> -----
> > P/E of 32 or so at the moment. Back out
> $10/share
> > of cash on hand and the P/E drops to 27.
> It'd be
> > hard for APPL to maintain a 27% growth in
> profits
> > (average estimate for next year is 18%)
> without
> > some new source of revenue.
>
> Call me a stock novice, but the relationship
> between a P/E ratio of 27 and a 27% annual profit
> growth rate is not apparent. What exactly are you
> saying?
>

I'm not sure what level of technical you want, so I'll aim for the middle...

A share of stock can be viewed as many things, but essentially it is a fraction of the company and its earnings. At a PE of 27, it would take APPL 27 years to pay off your investment using your fraction of the earnings - assuming no growth.

If APPL grows revenues at 27%, it will take about 8 years to pay back your investment. Whether you get that payback in cash (dividends) or a bigger company (R&D, acquisitions, ... - hence a higher stock price) or a mix, you reap the benefits.

That comes down to about a 9% return on your investment - or about the average stocks have returned (excluding taxes and inflation it's about 10.3% over the past 80 years).

So, if you're paying more than 27 times earnings, you're betting that APPL will grow revenues more than 27% - or you'd have invested it in some index fund.

[davester]

Interesting. I just ran the numbers on a spreadsheet and it works. Is that some kind of stockbroker rule-of-thumb that somebody noticed? There is no intuitive link between the P/E of 27 and the 27% revenue growth. As to whether the 27/27% thing means anything, who's to say? Their recent growth has been huge, and there are a number of indicators indicating that they will show solid growth for the near future, although it has to stop somewhere unless they continue bringing in paradigm-changing technological hits. Many folks have faith that they will...after all, they are about the only company that has been producing and selling electronic products that consider the human factor. That is what has been fueling growth.

[raz]

> Interesting. I just ran the numbers on a spreadsheet and it works.
> Is that some kind of stockbroker rule-of-thumb that somebody noticed?

An old economist friend of mine used the P/E as a quick-and-dirty metric for expected growth. There are better ones, but this is a good first approximation.

For example. Google closed yesterday with a P/E of 68. It'd take about seven years of 68% growth to pay that back. I'm fairly certain they can't pull that off for seven years. But, I could be wrong.

> although it has to stop somewhere unless they
> continue bringing in paradigm-changing technological hits

How many iPod-like products do you think APPL can pull out of their hats? And how long can they claim 70% of that market? How big a profit margin can they maintain when they produce Intel desktops?

All stock transactions on the market are made between someone betting the stock will go up and someone betting it will go down. The answer to the above questions will affect whether you should have bought or sold.

If we could see into the future, this would be easy :-)

[Article Accelerator]

raz Wrote:
-------------------------------------------------------
> P/E of 32 or so at the moment. Back out $10/share
> of cash on hand and the P/E drops to 27.

OOH, scary! If you like that, you'll like these too:

GOOG 72.9
AMD 90.3
HPQ 36.1
ADSK 29.3
ADBE 29.2

AAPL is grotesquely undervalued right now.

[Article Accelerator]

raz Wrote:
-------------------------------------------------------
> How many iPod-like products do you think APPL can
> pull out of their hats? And how long can they
> claim 70% of that market? How big a profit margin
> can they maintain when they produce Intel
> desktops?

1. As many as they want. Apple is virtually the only innovator out there right now.
2. 70%? Not long--it's continuing to rise.
3. What does the CPU make have to do with Apple's profit margins?

[raz]

Article Accelerator Wrote:
-------------------------------------------------------
>
> AAPL is grotesquely undervalued right now.

Then, you should be buying.

As for me, I sold off half when it dropped past 70. I'll hold the rest for a while longer.

>> How many iPod-like products do you think APPL can
>> pull out of their hats?
> 1. As many as they want.

I don't see that. The iPod is nearly iconic, and represents (IIRC) over 50% of Apple's bottom line. If Apple could produce another such innovation - let alone 'as many as they want', they would increase revenue (and their company value) accordingly.

Products like the iPod come along extremely rarely. What is the last product that conquered consumer consciousness like that and was dominated by a single company? I'd like to say the telephone (pre-1983), but I'd welcome a more recent example. Perhaps the Sony Walkman, though for a far briefer period.

[raz]

Not that anybody's visiting this thread, but Xerox is probably the last company with an equivalent hold on the market/mindset to the iPod.

[Article Accelerator]

...and Kleenex and Windows and...