I haven't been an Apple bull, largely because I am concerned that the premium they command for the iPhone and iPad lines aren't sustainable in the face of intense competition from devices that perform just as well but have lower price points. Despite this concern, my interest in going long AAPL is piquing because I think they have a much more limited downside risk than is commonly perceived.
Specifically, Apple's large cash position, though it would be vastly reduced by the tax hit required to free it up (most of it is stashed overseas), provides the base of the backstop. Also, Apple has an incredibly devoted user base, so if growth ceases, I believe they could easily shift the iPhone and iPad lines to emulate what they do with Macs... maintain premium pricing and high margins by resigning to cater to a niche segment of the market more than willing to pay the premium and remain loyal. These two things combined lead me to believe that it would be impossible for AAPL to fall below $200/share (barring a crazy lawsuit or a decision to invest heavily and bleed cash) because, in the worst case scenario, they could hunker down and continue to churn out $10 or $15/share in profits by staying focused as described above.
Given that AAPL is trading ~$500, I'm trying to decide what entry point I think would be a good bet. If $200 is my "doomsday base" and $500 is the current price, obviously I'd want to buy somewhere between. The key determinant is what Apple will earn per share over the next five years. We know that sales growth is likely to continue to climb (even if at a slowed pace) because the broader market for their products is growing fast enough that, even with declining market share, they will still increase sales. We also know that their profit growth, in the most recent year or so, has stalled, as margin pressures have offset growth. Given that they're at a clip of about $40/share in earnings now, I'm trying to determine a safe estimate for the next 3-5 years, then use that to calculate my entry point. I'd love to hear thoughts and reasoning on what others think Apple will earn per share over the next few years, and especially the reasoning behind it (what will happen to margins and how they'll interact with sales growth and increased costs associated with expansion into new product categories). Thanks! |
