“Apple (AAPL) reported earnings last month and although record revenue and profits were seen, shares were punished, falling almost $64 in one day to settle in the $450 area they still trade in today,” Josh Arnold writes for Seeking Alpha. “So why did market participants punish Apple shares so harshly? Disappointing guidance was the culprit. To my view, the market has decided that Apple no longer knows how to make and sell its products and that the company is going to slowly die off in the coming years. Of course, this is ridiculous as Apple’s domination among consumers is still intact.”
“So what does the market actually expect out of Apple? We’ll use a DCF analysis to put the pieces together and see what Apple’s doomsday expectations look like,” Arnold writes. “Apple is currently priced to grow earnings by only 3% in the coming years, despite analyst expectations of over $80 per share in earnings in 2018.”
Arnold writes, “I understand that a big reason why Apple has fallen so precipitously is because when earnings estimates are falling and guidance disappoints, no one knows where the bottom is and nobody wants to be caught holding the bag. However, when shares have gotten so preposterously cheap, it is hard to ignore. If we look at priced-in expectations, we can see that as long as Apple can exceed three percent earnings growth for the foreseeable future, shares should outperform. In addition, if we assume that Apple will make $80 per share in earnings in 2018, even at the ludicrous valuation of 8 times earnings, shares should trade at $640, or roughly 40% higher than they are today. If we apply a 10 times earnings multiple, shares would trade near $800.”
Read more in the full article here.
[Thanks to MacDailyNews Reader “Fred Mertz” for the heads up.]