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Apple Stock at $7,756 this Year?

Could Apple (NASDAQ: AAPL) stock really hit $7,756 per share this year?  Maybe even next quarter?  Well if we apply Amazon.com’s (NASDAQ: AMZN) price to earnings multiple today, which sits at 189 to Apple’s trailing twelve months earnings of $41.04 per share, we land on that magic number.  That’s right $7,756 per stub.

You might ask is this a fair multiple to give to Apple?  A brand leader with a die hard loyal following.  A company with the greatest balance sheet on this planet, which sits at $110 billion in cash and marketable securities along with ZERO debt.  A company that has completely disrupted the music industry, mobile industry and computing industry laying waste to competitors along the way.  Certainly Apple has been one of the greatest stories this past decade, same as Amazon.

I would answer both yes and no to this question of whether it is fair to give such a lofty Amazon multiple to Apple.  I would say that Apple deserves no less a multiple than Amazon thanks to Apple’s superior balance sheet, business model (i.e. margins, profits, etc), growth trajectory and talented management team.  I would say no because I’m not so sure Amazon or Apple deserves such a lofty multiple.

Analysts are looking for five years of annualized growth for Amazon of 32.65%.  Amazon trades for a PEG ratio of 5.51 at today’s price. On the Apple scorecard analysts are predicting 21.84% annualized growth for Apple putting their PEG at an astonishingly cheap 0.57.  Amazon is getting about TEN times the multiple of Apple! Very generous of Mr. Market wouldn’t you say?

Amazon shows about $6 billion in cash and no debt while Apple has $110 billion and no debt.  Amazon’s levered free cash flow is $1 billion, which is 1/30th of Apple’s $30 billion.  Amazon’s profit margin is about 1% while Apple’s is a magnificent 27% (TTM).

So one can clearly see Apple is significantly ahead in most all metrics with the exception of analyst growth rate (32% versus 22% in favor of Amazon).  I would argue with analysts and say that over the next five years Apple will have higher annualized profit growth than Amazon.  However, even if nothing less than analysts estimates today reflect within a few points of reality for both stocks one has to wonder why Mr. Market has propped Amazon up onto this pedestal and sent Apple to the bargain bin.

Sometimes the answer to this question is nothing more than Mr. Market doing what he always does.  Things are often over-priced or under-priced in the short term.  These inefficiencies can last weeks, months or years but eventually they settle out.  I don’t think Apple would deserve a 189 PE today and I also cannot see Amazon deserving of this either.

Somewhere in between Apple’s 11 PE multiple (ex-cash) and Amazon’s 189 PE sits a number where both companies would likely be considered fairly valued, where their multiple equals their growth rate giving them a PEG of 1.0 or thereabouts.  For Apple this is 22 times $41 trailing twelve months earnings which is $902. From there I would add in Apple’s $110 cash per share because it represents almost 20% of the companies market cap.  This gives you a target of $1,112 per share. Ironically I think this is close to one analyst estimate of $1,111 that we saw come out a couple weeks ago.

For Amazon we use their growth rate of 32% to multiply 32 times EPS of $1.21 yielding a target price of $38.72 and PEG of 1.0.  Even if you doubled this to a very generous PEG of 2.0 you get to $76/share for Amazon.  At Amazon’s multiple things can get ugly in a hurry. The company has been given a pass by Wall Street several times for revenue and earnings shortfalls with the argument the company is simply investing in the future.  Amazon faces increasing headwinds such as state sales tax collections and other heavy capex outlays for years to come.  Will investors tire of this?  Maybe at some point they will and the free passes will stop.

Don’t get me wrong, I love Amazon and am a loyal customer.  I use their store as well as their web services.  They do a wonderful job.  However every business has a price.  Just like I would not pay $5 million for a pizzeria netting $100,000 per year I find it hard to pay up for Amazon at these prices.  I do find it easy to accumulate Apple shares at these bargain prices though.

This is how I value stocks and typically over time Mr. Market gets it right and adjusts accordingly.  Until then anything is possible and valuations may suspend themselves artificially high or depressingly low for extended periods.  You have to weigh the risk and rewards of each position and invest accordingly.

 

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