Apple still looks a bargain after $100 bln run
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — Large companies rarely grow fast due to their sheer size. Yet Apple increased sales by more than 50 percent in 2010. That sent the company’s value up by an astonishing $100 billion to nearly $300 billion. The odds of the tech firm led by Steve Jobs repeating this wondrous performance are low. The shares still look a good bet, though. Apple’s valuation looks oddly subdued once adjusted for its hulking cash pile.
Apple’s shares trade at about 19 times estimated earnings for fiscal 2011. By contrast, the forward multiple of the S&P 500 is just over 13. Yet Apple has more than $50 billion of cash and investments on its books, with zero debt. Subtract this cash, and Apple trades in line with the broader market.
That might make sense if Apple’s growth was sputtering. Analysts predict, however, that sales will increase 35 percent this fiscal year, thanks to the popularity of the iPad and iPhone. That’s astonishing given that revenue growth for the market as a whole should be roughly equal to U.S. GDP. Moreover, Apple’s business has operating leverage, which means profits should grow faster than sales, meriting a substantial premium to the stock price.
True, Wall Street often trends toward inflexible optimism. Yet a gut check suggests continuing sunny times in Cupertino.
Let us count the ways. Sales of iPads are taking off sharply among big companies. Smartphone penetration in the United States is forecast to double in 2011. Macs have been gaining share, but are still less than 5 percent of the global computer market. And Apple’s push into ads and TV could become new and big sources of growth. Moreover, all of the company’s devices play well together, so people who use one Apple device often buy others. These trends will end someday, though probably not in the next few seasons.
It seems unfathomable that Apple will shine quite as brightly next year as it did in 2010. But the company could well be the most valuable company in America by the end of 2011.