Eating forbidden fruit

Sometimes the market offers you an opportunity that cannot be resisted. This opportunity is not some obscure stock that hours of research will uncover as being undervalued. It is Apple - the world famous maker of computers and smartphones.

Every investor is familiar with the Apple story, everyone knows how its stock has performed over the last five years and many people realise that it is now the second largest company in the world by market capitalisation. So the obvious conclusion is: investors have already missed the boat and Apple is now too big to grow quickly.

I beg to differ. The personal computer market is enormous and Apple is a small player in it (in 2009 it had 7.4% of the US market.) Profits are traditionally split between the OEMs (like HP and Dell) and Microsoft who supplies the software. However when Apple sell a box they supply the hardware and software and so can make a better margin. The hardware and software are designed to work together and so the overall result can be more pleasing.

I imagine that the iPad is already eating into this market somewhat and as consumers grow used to Apple products they are then more likely to look to the rest of the range for their computer needs (the halo affect.)

So how about the numbers?

Apple earned $6.43 per share in Q4 2010. Analysts predict earnings of $23 in 2011 but I think this is much too conservative. I predict earnings of $30 as the iPhone and iPad continue to sell like hot cakes. Cash and securities per share is now about $60. Subtract $60 from the share price of 330 to get an enterprice value of $270. This gives a 2011 PE of 9!

Apple is now cheaper than last time I looked and yet the growth is not slowing down. I don't understand why it is valued so cheaply but I think that the market is wrong. The Apple shares I bought last year are now showing a 30% gain. I have now bought some more.

Do your own research and then buy Apple!