Is Apple fully ripe?

Another blow-out quarter from Apple, another market under-reaction.

Here is one key statistic: Free cash flow for the last quarter was over $10 per share. If you annualise that to $40 Apple has a Price/FCF ratio of under 10! And yet earnings growth was over 100%!

The reason Apple is so cheap is clear - its market cap. of $358B. How can a company that big grow fast in the future?

To get the market cap. in perspective, Research In Motion (the Blackberry maker) has a market cap. of $15B and Nokia has a market cap. of $22B. Microsoft has a market cap. of $228B

In order to continue growing at stellar rates Apple is going to have to grow its markets and enter new markets. For example the iPhone has grown the overall smartphone market as well as stolen market share from Nokia and others. The iPad has virtually single handedly resurrected the table market.

There are rumours that Apple is going to enter the TV market - probably by combining its Apple TV box with a flat screen. While this could be lucrative it is not going to be the next iPad - it would be for consumers rather than business and consumers do not change TVs as often as computers.

Could Apple double its earnings in the next couple of years? Quite easily and without entering any new markets. Apple has less than 10% of the global mobile phone market and less than 10% of the global PC market so there is plenty of room for growth there. Apple also makes bigger margins on its products than competitors as they are all at the premium end of the market.

So here is the problem. The numbers say that Apple is amazingly cheap. The market cap. says that Apples growth must slow.

But here is the odd thing: Apple is cheap even if the growth slows to 10%.

The risk - reward ratio is phenomenal for this one - still a screaming buy.