Photo: Yahoo Finance
Apple’s stock has essentially been flat this year, despite the fact that the company continues to fire on all cylinders.It just delivered an astounding 95% growth in net profit on a year over year basis for Q1, yet investors mostly shrugged.
Why is the stock delivering weaker returns than the S&P 500? Credit Suisse analyst Kulbinder Garcha met with 150 institutional investors over the last two months to talk about Apple and answer that question.
Garcha has Apple rated a buy, with a $500 price tag. What follows are the five biggest worries from investors, and why they’re wrong in Garcha’s opinion.
After Apple's iPad shipment came in weak last quarter, investors started wondering if the computer wasn't as popular as people thought. Poppycock! Tim Cook called said Apple has the 'mother of backlogs' for the iPad, and CFO Peter Oppenheimer said the company will be churning out iPads to meet demand, which seems to be strong.
Investors worry that the iPhone market is nearing 'saturation.' They think Apple can't find many more customers for its super phone. Garcha says that's crazy talk. The smartphone market is expanding, giving Apple more customers, and it's still not on all the carriers it could be on. He predicts Apple's iPhone growth remains impressive. He's calling for 85% unit growth for fiscal 2011, and 52% growth for fiscal 2012.
Apple is now 2.6% of the S&P, which some investors believe will be a barrier to the stock trading higher. Garcha says 5% of the S&P would be a more reasonable barrier. He also says that Apple's P/E is 50% lower than companies that have hit comparable levels of the S&P. Investors also think the stock is over-owned by funds. Garcha says it's acutally under-owned.
Garcha admits Steve Jobs' health is a drag on the stock, but he argues Apple has enough opportunities in the next few years that even without Jobs at the helm. Here are three big near term opportunities:
- Low end iPhone that opens up a new market. The iPhone would be more reliant on streaming media, so Apple could lower the price.
- More Apple stores and sales in emerging markets. It only has 4 stores in China. It needs to change that.
- Sell more iPads and iPhones to corporations. RIM is blowing it, Microsoft isn't ready. Now is the time for Apple to strike.
Obviously, the big problem for Apple is the long run. How can it innovate with out Steve Jobs at the helm?
Apple will probably have $100 billion in cash on its books by 2012. This annoys investors who want Apple to do something with the money. Apple isn't going to make a dumb acquisition, and it probably won't return the money to shareholders. So, it seems like it's just sitting there.
Regardless, Garcha says Apple's P/E is now below the market. And that's just nuts. Future earnings don't justify Apple's tepid stock growth.
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