Monday, 17 December 2012

Apple Stock - Support Line, Can it hold?

As has been on the news in multiple places, Apple stock has taken a huge beating in the last 2-3 months.  After hitting a high of ~$700 back in Sept, its now trading down 26% to $518, hitting below $500 at one point today.  While I did make a call for a short term bottom around $620, that unfortunately didn't pan out as Apple resumed its downward trend.  So the next support line is ~$520 where it is today.  Will Apple hold the line?  

Remember, AAPL is still up 28% for the year, that's hardly something to sneeze at.  So while one metric you can use to determine if something is oversold is its yearly gain, 28% is still an justifiable fair value gain.  Another argument about the stock is that its PE ratio is very low, currently 11.75, if you look at its historical PE:

You can see that Apple did hit similarly low PEs in 2009 and in early 2012.  While 11.75 is below its historical average, it is a big strange considering Apple's earnings growth.  Forward PE is estimated at only 7-8, an incredible bargain.

So why is Apple being undervalued so much by these metrics?  Two words...iPhone competition.  For all the talk of iPads, Macs, iTunes, etc etc, the vast vast bulk of Apple's revenue (over 52%) comes from the iPhone.  With Samsung starting to gain more and more marketshare via its extremely successful Galaxy line, Windows 8 Phones launching, Blackberry 10 (don't laugh!) launching next month, its hard to see the iPhone making much headway against all that competition.  With recent reports of order cuts from supply chain checks, the market is very jittery over Apple's future dominance in the smartphone industry.  If iPhone starts dropping, Apple sales will follow and thus the fear over Apple's future.

Is this overblown?  I think so.  While I agree that iPhone's best days are behind it, Apple is still going to grow a more than respectable amount, more than justifying a 7-8 PE ratio.  So my conclusion is that the market overreacted a bit (both in taking Apple to $700 and down to $500) and that there's a good potential for a decent profit from its current price.

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