Apple Skeptics Left Behind

By MoneyShow.com | February 02, 2012 AAA

Apple’s earnings shocked Wall Street last week. MoneyShow’s Jim Jubak explains here why investors should not be skeptical of Apple’s growth prospects.

So Apple blew out earnings for the December quarter—$13 and something when the street was looking for $10 and something and Apple was saying $9 and something…a huge, huge upset surprise. I mean, companies usually measure their upset surprise in pennies or nickels, and we’re talking about dollars here.

The amazing thing is that Apple’s not fundamentally cheap if you look at only the dollar price. We’re trading at $450 a share, but if you look at the underlying stock fundamentals…this is still trading at a trailing P/E of just ten.

I mean, you’ve got to ask yourself why are there so many skeptics about Apple. A stock that’s showing this kind of results doesn’t wanted to be traded at a P/E of ten. This is where you get sick with those. This is depressed steel companies’ territory.

OK, but why does nobody really believe it or why do a lot of people not believe it? I think part of it is because people are used to the technology story—being that technologies change frequently—and they say, "Well, this trend is not going to last for very long, so I don’t want to pay up for something that’s going to be over in a year or two."

There are counter-examples. The big counter-examples are Cisco (CSCO), which locks in customers; IBM (IBM); and more recently Microsoft (MSFT) and Intel (INTC) where you have some kind of long-term, clear advantage. To a lot of the skeptics, Apple doesn’t look that way. It looks like it’s just another fad, it’s just another box, it’s a nice little object, but hey, it’s not going to last for a long time.

I think that’s ignoring the things that lock in Apple and its customers right now. Things like iTunes, and the most interesting thing right now to me is the iCloud. This is the ability to upload to Apple’s server so you don’t have to keep it on your own machine, but it’s got the same effect as iTunes, which is as long as you stay within the Apple ecosystem, you’ve got access to all your stuff.

You go outside Apple and suddenly you don’t, so it’s a big reason not to change systems. As long as Apple gives you neat stuff every six months, why would you ever leave?

The interesting thing is that iCloud was only introduced three months ago, and we’ve already had 85 million people try it. Not all of them are using it, and not all of them are going to stick with it, but those are 85 million people who said, "Hey, this is kind of a neat thing. I’ll at least go and register," which means Apple now has the ability to know who these people are. It’s one more hook into them.

It’s one more reason for people not to change that Apple can exploit. And it means that going forward, as long as Apple doesn’t give people a reason to leave, these people aren’t going to shift very, very easily. That’s why I think a P/E of ten really, really underrates this stock; at $450, I might look to see whether I could get it.

Apple always shows a downturn in earnings and revenue in the March quarter because that’s just the way its business is structured. I might look to see—even though we know it’s coming, people always sell it off—I’d like to see whether I could get it at like $425. That would give me, I think, something like a 17% or 18% return to the target I have of $500 a share.

The real outlier here, the real thing that doesn’t fit into any paradigm, is Apple is now sitting on $100 billion in cash. Basically, Apple has enough cash to pay the entire Greek debt load for two years.

What’s Apple going to do with that? If Apple gives you some kind of one-time dividend, on top of buying at $425 to get to $500, you get more than 17% or 18%. That would make Apple look like a very, very attractive thing over the next nine to 12 months.

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