Once again shares of Apple Inc. (NASDAQ: AAPL) are in decline after a hot streak. AAPL stock seems to go in cycles like this, with big gains and then a period where Apple Inc. moves sideways or slightly downwards before another leg up.The sell-off in the stock is creating a wonderful trading opportunity before Apple reports earnings.
Shares of the transcendent technology company Apple are down 10% since the end of April slightly worse than the overall market. Pessimists argue that AAPL stock is facing a host of issues including increased competition and the loss of its CEO and inspirational leader Steve Jobs will derail the technology leader. While on the surface, such concerns are legitimate, but they fail to consider that Apple stock is cheap relative to earnings. In addition the tech company has proven over and over that it can print money from a profit perspective.
It’s not as if AAPL stock trades for a nosebleed valuation. It does not. I don’t get it.
If you take a few minutes to ignore the fear mongering headlines and instead focus on operating performance, you will see that Apple is worth substantially more than where shares trade today.
Over the last four quarters when Apple reports earnings it has blown away earnings estimates. In the last two quarters alone the company has bested Wall Street expectations by a whopping $1.00 per share. With nearly a billion shares outstanding we are talking about making a billion dollars more than estimates in a three month period.
Think about that for a minute. Apple is one of the largest and most watched stocks on the planet. One would think estimates would be fairly accurate. To beat by a billion dollars is a phenomenal achievement. To do it twice in a row when Apple reports earnings is frankly unbelievable.
The market reaction to such results: a brief burst of buying followed by aggressive selling. That makes no sense. The silver lining is that shares did jump in the immediate aftermath of announcing results. When the company released results for the period ending March 31, traders could have bought shares immediately prior to the release for $333 per share.
After the impressive report shares jumped to over $350 per share. That is a nice one day gain of close to 6%. The move was entirely predictable hence the concept of free money. Now, thanks to the pessimism of the bears the same set-up is taking place in advance of earnings for the quarter soon to end on June 30, 2011.
The average Wall Street estimate for Apple’s fiscal third quarter is for a profit of $5.63 per share. That estimate is thirty seven cents per share higher than where the number was 90 days ago, but the increase is likely too small. Given $1.00 beats in each of the last two quarters when Apple reports earnings, another beat is the most likely scenario.
Recently Best Buy (NYSE: BBY) reported results that were partially assisted by strong smart phone sales. That result bodes well for Apple. The sellers are simply missing their mark with this stock. If anything Apple deserves a much higher valuation.
For the full year ending September 30, 2011 Wall Street expects the company to make a yearly profit of $24.76 per share. In the following year that number jumps 16% to $28.72 per share. At current prices Apple trades for less than 13 times current year estimates. It is as if the market believes Apple’s earnings will decline from here.
By comparison the market has no problem giving stocks like Salesforce.com (NYSE:CRM) a nosebleed valuation. The supposed unlimited potential of cloud computing is somehow more attractive than what Apple has proven it can do time and time again.
Well guess what? Apple is moving getting in on the cloud action with its iCloud product. I wouldn’t bet against the company from succeeding greatly.
Put a similar Salesforce.com valuation on Apple and you get a stock that is worth over $1,000.
Well, let’s not get greedy here. Take the free money on Apple when it next reports earnings. With the stock bouncing off technical lows a 5-10% gain in one day is not out of the question.