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Monday
Feb132012

Is Apple (AAPL) a $17,000 Stock?

Of course not.  While there are no $17,000 price targets for shares of AAPL (yet), with the stock topping $500 per share on Monday, there is a vigorous debate as to what price the stock should realistically trade at.  Is the current price overvalued, undervalued, or fairly valued?  At times like this, it often helps to compare the stock in question to similar stocks to see how they are valued.  To that end, in the table below, we have listed the P/E ratios (based on the current year's expected earnings) of comparable stocks to Apple and then calculated where shares of AAPL would trade if the stock had a similar valuation.

At a current price of $502.50, AAPL trades at 11.8 times this year's expected earnings.  The S&P 500 now trades at 13.5 times earnings on a weighted basis, while the average P/E ratio of the 500 stocks in the index on an unweighted basis is 17.7 times earnings.  Given the fact that AAPL has one of the highest individual growth rates of any stock in the S&P 500, it isn't too much of a stretch to assume that the stock should have a 'market' multiple.  To get there, though, AAPL would need to rally to just under $574 per share, while an average P/E ratio would send the stock to $752 per share.  Within its peer sector, the average stock in the S&P 500 Technology sector trades at 17.1 times earnings, which would equate to $728 per share.  While AAPL is a member of the S&P 500 Technology sector, it is often considered one of the best retailers in the country as it boasts one of the highest sales per square foot of any chain.  The average retailer in the S&P 500 trades at 16.4 times earnings, and based on that multiple, AAPL would be worth $698 per share. 

The scenarios outlined above are based on the multiples of groups and sectors that AAPL is often considered part of, but what about individual stocks?  In the middle section of the table we have listed the earnings multiples of eight high profile 'old guard' Technology stocks.  As shown, the average multiples of these stocks ranges anywhere from 10.8 (INTC and CSCO) to 18.9 (YHOO).  Applying these multiples to AAPL would equate to a share price of anywhere from $459.80 to $803.70.  So, compared to the multiples of CSCO, INTC or MSFT, AAPL would be modestly overvalued, while a multiple similar to any of the other stocks would imply that the current price of AAPL is too low.

Now we move on to the fun part.  Let's just assume that given its phenomenal growth rate, that AAPL were to trade at a valuation similar to the Technology/Web stocks in the S&P 500 with the highest multiples.  Currently, the three stocks in similar sectors to AAPL with the highest P/E ratios are Amazon (AMZN), Salesforce (CRM), and Netflix (NFLX).  These stocks have multiples ranging from 78.8 times earnings (AMZN) to 422.5 times earnings (NFLX).  If AAPL were to trade at a multiple similar to any of these names, the stock would currently be massively undervalued.  Based on AMZN's multiple, AAPL would trade at more than $3,300.  If it had CRM's multiple, the stock would trade at more than $4,000 per share.  Finally, if AAPL had a multiple similar to NFLX, the stock would trade at just under $18,000 per share!

Obviously, AAPL is not likely to trade at a multiple similar to the ones that NFLX, CRM, or AMZN currently have.  In the case of NFLX, not even the Fed can print enough money to cover a price that high.  From the law of large numbers, competition, and questions over the sustainability of its recent track record of torrid growth, there are legitimate factors keeping AAPL's multiple where it is.  That being said, when you compare the stock's multiple to that of its peer groups and peer stocks, arguing that the stock is wildly overvalued just because of its $500 share price seems to lack much in the way of credibility.

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