Daily Archives: June 7, 2011

Apple’s Valuation: The One Article Every Investor Should Read

This will be one of the most important articles I’ll ever write on Apple’s (AAPL) valuation, and it’s the one piece that every individual investor should read. There seems to be a tremendous amount of confusion among market participants as to which valuation metrics actually matter in assessing the present and future value of stock prices in general and Apple’s in particular. I hope this article will help correct a lot of these very critical mistakes that many individual investors tend to make when attempting to forecast Apple’s future value. This applies to nearly all tech stocks.

I’ll come right out from the get-go and say that the vast majority of mistakes made by investors stems largely from their unwavering stubbornness to use non-ubiquitous valuation metrics in order to justify some theoretical or abstract future value that the broader market simply does not accept.

I have repeatedly stated that the only valuation metric that matters is the one the collection of fund managers care about. Everything else in between is not only counter-productive, but designed to trap investors into an investment thesis based on a theoretical and flawed future value that simply does not exist.

The two biggest theoretical valuation models that have the highest likelihood to mislead investors are the Price-to-Earnings Ratio x-Cash (P/E x-cash) and the Price-to-Free-Cash-Flow (P/FCF). I’m not saying that these two valuation ratios are inherently evil or bad valuation ratios, but what I am saying is that these two are by far the most highly misused metrics. Apple’s cash and cash flow play a very significant role in its valuation, just not in the way that 95% of individual investors think that it does. (read more)

Bullish Cross Professional Analysis
Forecasting price targets for Apple requires an ability to predict two entirely separate variables that fall within two entirely different disciplines — (1) Apple’s earnings per share at some point x in the future and (2) Apple’s trailing P/E ratio at that same point in time.

The first variable — predicting future EPS — falls under the discipline of accounting, financial statement analysis, thought clarity and intuition. It is both an art and a science to be able to predict what Apple or any company will earn in the future and there aren’t many people who have been able to do so with any level of consistency. Being able to predict the earnings outlook, however, is only one part of the equation.

The other even more important variable is being able to determine what Apple’s trailing P/E ratio will be at some point ‘x’ in the future. One can miss their EPS forecast by $1.00 or even $2.00 ($0.50 a quarter which is a big miss) and that would have a significantly lower impact on forecasted future value than failing to accurately predict Apple’s P/E ratio by a factor of even 1. There’s a huge difference between Apple trading at a 14 P/E ratio at the end of fiscal 2012 and Apple trading at a 15 P/E ratio at that time.

I will be spending a considerable amount of analysis on projecting Apple’s P/E ratio at Bullish Cross Pro over the next few weeks. I will also be providing an in-depth analysis on how to best capitalize on the obvious long-term direction of Apple’s stock price so as to maximize profits while reducing risk exposure to a negligible rate. Putting on spreads at the right times can lead to an eventual zero-sum risk exposure by reducing cost basis down to zero.