Apple Inc (AAPL)

[langostino]

indeed roni

As the market disagrees today on plenty of Morningstar's DCF-based valuations. Funny thing how that works. Those whose DCF-based valuations on semi equipment stocks showed them with serious downside last fall got laughed at and dismissed as the market disagreed with them more each day through December and early January. Of course, those "true believers" unwilling to try and understand or at least review the assumptions of the DCF models for those companies are now down about 40% from where the market agreed with them less than 9 months ago.

The trick is ... are Morningstar's input assumptions flawed? Because if they are not, eventually, the market will at some point eventually return to "fair value" of DCF.

Personally, I think Morningstar's assumptions are flawed, and I think you'd have to be smokin' something to believe you'll have an opportunity to buy at $14 ... shy of a nuclear device going off in Cupertino. But unless you're willing to grant Apple some very aggressive assumptions, it's not worth what it trades for today.

A few years back when Apple was coming off of a down-cycle, experiencing accelerated growth on the back of a stunning new category-killing product, there was a similarly euphoric reaction among the emotionally attached part of the Apple shareholder base. They weren't willing to accept that Apple's then alleged 30% growth rate was not sustainable -- that it was artificially inflated by carryover tax credits and a temporarily too-low tax rate, together with overly-easy year over year comparisons. I hear people talking the same way today, albeit to a lesser degree, saying Apple should be valued on a multiple commensurate with a rapid growth company based on the last 4 quarters' revenue growth rate rather than a longer moving average.

As I mentioned before, I think AAPL is in a sweet spot and will be into 2005, but inevitably, the current growth rates will wind up slowing, the multiple the market now affords will compress, and there will be people who wake up a couple years later to find the stock lower than it is now (or will be whenever it peaks prior to the inevitable slowing of growth), and wonder what unfair element of the universe is responsible for their misfortune.

The difference this time is that even the lead sell-side brokerage is telling you AAPL's not fundamentally worth what it sells for ... if you're willing to read between the lines. That's what Merrill means when they say the current share price is dependent on momentum and ever-rising earnings. Translated: when the momentum slows, the stock falls because the fundamentals don't support it here. I'm not sure they could be any more obvious about it. And if that's the message from the most egregiously sales oriented shop in a massively tilted sales business, it takes an investor in serious denial not to accept it.

Nothing wrong with riding AAPL up as a momentum trader's play, but if that's the game, it's not a bad idea to have trailing stops and the ability to divorce affinity for the company and its products from investment reality once the momentum slows. Most amateur investors can't do that. (BTW, I think you're an exception to that!). Reading back through internet stock bulletin boards from 2000 and 2001 make that pretty painfully obvious.