"How can any investor be frustrated with the performance of Apple over the past five years?"Still, Apple has a powerful weapon to protect its position

Apple Still a Buy, Say Analysts



By IAN SHERR

Steve Jobs has spent his career challenging conventions about personal computing. He's transformed an industry and changed the way we think about technology. A look back at the accomplishments of an American business icon.

Investors may be undervaluing Apple Inc. even as its shares near all-time highs on the strength of hit gadgets like the iPhone and iPad.

On Wednesday, investors had a new reason to re-evaluate one of the most popular destinations for equity investments: the resignation of co-founder Steve Jobs as chief executive.

Apple shares on Thursday eased $2.46, or 0.7%, to $373.72 in 4 p.m. Nasdaq Stock Market trading, as investors paused to consider how the company might change, even though Mr. Jobs's departure wasn't unexpected.

The ebb in Apple's share price will likely prove fleeting, analysts and investors say. The company has built commanding positions in its mobile-device business, enjoys margins that are the envy of other manufacturers and has created a brand as closely associated with technology as that of Nike Inc. is with athletic equipment. The company also has $76 billion in cash that accounts for more than a fifth of its market valuation.

Analysts at Goldman Sachs expect Apple's shares to grow by nearly a third to $490 over the next 12 months, a view broadly shared in the analyst community.

"Apple is priced like they've taken all the market share they can and I think that's crazy," said Kevin Landis, president of SiVest Group, which owns Apple shares. "It's on its way to being the most innovative and dominant consumer electronics company in the world, and the lock they have on the market is breathtaking."

Investors don't need to look far for evidence that Apple is cheap. The company's shares trade at a discount to peers in the technology sector even though it is on course to post a roughly 80% rise in earnings for the fiscal year ending in September. Apple stock trades at 13.5 times future earnings, down from 16.7 times at the beginning of the year, and below competitor Google Inc.'s 14.8 times, according to FactSet data.
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Analysts and investors say the market may be underestimating the potential growth of the company's mobile business, which accounts for more than half of Apple's stock price, according to stock-analysis firm Trefis. Though Apple's iPhone is widely credited with having created the smartphone market, it accounted for just 18.2% of global sales in the second quarter, according to Gartner Inc.

Shaw Wu, an analyst at brokerage firm Sterne Agee, says Apple's mobile-phone business could triple in the next few years as the smartphone market grows by as much as 50%. He sees much of Apple's opportunity in developing economies, such as China, where smartphones are starting to catch on.

"As much success as the company has had, they still have very little share," Mr. Wu said. He sees Apple shares reaching $500 over the next 12 months.

The iPad tablet computer will also factor into the company's continued performance. Less than two years old, the iPad has already eclipsed Apple's longstanding Mac computer business in unit sales with roughly similar gross margins of around 30%, according to Trefis.

Some investors say the iPhone and iPad remind them of another opportunity Apple exploited: the iPod. The company used its success with the digital music player to invigorate its business, spurring demand for Mac computers as well the products that followed.

Of course, Apple faces competition that could erode its position. Apple has already lost the No. 1 spot in mobile operating systems to smartphones running Google's Android operating system. Manufacturers, like Samsung Electronics Co. Ltd. and HTC Corp., are now using that software on tablets that could compete with the iPad.

Apple also has to keep coming up with the next big thing to propel its growth. Consumers are finicky, investors say. There's always the chance that Apple could fall out of favor, as it did in the 1990s, when Microsoft Corp.'s Windows expanded across the personal-computer market.

That constant threat to Apple's top line puts a natural pressure on the company's valuation.

"They have to keep reinventing the new thing and investors are always skeptical about that," said Tim Ghriskey, chief investment officer for Solaris Asset Management in New York. "There was such skepticism about the iPad when it came out and there will be skepticism when the next thing comes out. That restrains the valuation."

Still, Apple has a powerful weapon to protect its position: a bank account that contributes roughly $81 per share in value. Some investors say the cash gives Apple an edge because the company can cut deals for bigger quantities of components than its competitors, allowing it to drive a harder bargain. That, they say, is part of the secret to the company's gross margins, which stood at 39.4% in its last full fiscal year. By comparison, Dell Inc. posted a 19.1% margin and Hewlett-Packard Co. 23.62%.

"How can any investor be frustrated with the performance of Apple over the past five years?" said Noah Blackstein, who manages the Dynamic US Growth fund, which holds Apple shares. "I don't have a problem with how much they have or how much they've grown."