Why Apple (AAPL) Is Still a Bargain Despite Its Lofty Price

Is Apple (AAPL) still a bargain despite its lofty price? An argument based on earnings growth and valuation could be made to support the contention that AAPL is still a bargain.

Since the 2003 market lows, Apple, Inc.’s (AAPL) stock has made one of the largest gains of any stock on a major U.S. stock exchange. Apple’s stock has gone from about $7 per share to the $625 per share range; a gain of 8,828%. Such an astounding gain is enough to make many investors think twice about holding or buying Apple’s stock. After all, how much more can a stock that has gained 8,828% in less than a decade go up? The answer to this question is how to value Apple’s stock and the future growth for Apple’s earnings.

Apple passed Microsoft to become the largest technology company by market capitalization, and now has a market capitalization of approximately $581 Billion, which is more than $321 Billion greater than Microsoft’s market capitalization. Apple’s market capitalization has grown so much that it is now has the highest market capitalization of any company in the world. However, even with its lofty market capitalization, by standard stock market valuation measures, Apple’s stock is still relatively inexpensive.

Apple’s current stock price to earnings (P/E) multiple is approximately 18, which is relatively cheap for a high technology company. This is due to many valuation factors, including: expected earnings growth, current P/E, historical P/E averages for the technology sector, and cash on hand.

Apple’s current 18 P/E is based on the fact that Apple has earned nearly $35 per share on a 12-month trailing average (over the past year). The average 2012 earnings estimate by stock analysts for Apple is in the $40 to $45 per share. During a period of economic expansion, established growth stocks such as Apple typical have forward P/E multiples of between 20 and 50-times projected earnings. A 20-times P/E multiple would put Apple’s stock as high as $900 in 2012. A 50-times P/E multiple would put Apple’s stock as high as $2,250 in 2012. A 50 P/E multiple is unlikely for a mature company like Apple, despite its high growth rate. However, if Apple meets its 2012 earnings estimates, it is not unreasonable to assume the stock will trade between $600 and $900 per share in 2012.

Apple’s cash holdings of $97 Billion make its stock look even cheaper, since the cash could be added to Apple's valuation. In March 2012, Apple management announced that they are going to start paying a quarterly dividend of $2.65 per share. This dividend may attract a new breed of Apple investors, such as mutual funds, institutions, and investors that invest in dividend paying stocks. Even with this sizable dividend, analysts believe Apple's cash position will continue to grow.

Of course, as with all stocks, Apple does have some risks associated with it, which could put a dent in Apple’s earnings and its corresponding stock price. The primary risk is that with their founder and leading visionary force, Steve Jobs, now deceased, Apple may lose its visionary and technological edge. When Steve Jobs was forced out of Apple in 1985, the company floundered, losing money as they attempted in vain to develop new products. The question this time around is whether Apple is now ready to continue to innovate and grow earnings without Steve Jobs? Another large risk that Apple faces is the overall state of the global economy. Much of Apple’s growth is now outside of the United States, so even if the United States is experiencing economic growth, Apple needs economies in Asia and other parts of the world to grow, in order to meet earnings expectations.

Risk factors aside, Apple’s stock AAPL appears to be undervalued based on expected 2012 earnings, even as it trades near $625 per share. Is AAPL still a bargain despite its lofty price? Only time will tell. If Apple continues its growth trajectory, AAPL may be the first stock to reach a market capitalization of $1 Trillion.

Adequate due diligence should be performed before any investment decisions are made. For disclosure purposes, I currently hold no position in AAPL.

Disclaimer: This article was not written by a financial professional or a registered financial advisor. This article is for informational purposes only, and is not intended to be solicitation or recommendation to purchase securities mentioned herein. Please consult a registered financial advisor to ensure you understand the risks and rewards associated with buying and selling stocksand other financial products.