AAPL Stuff

I think it's time to revisit AAPL's prospects, valuation, etc. I think AAPL is set up to run into the end of the year - just how much though I'm not certain. Some, like Cody Willard, state that we can get $100 out of this stock between now and year end. More importantly, this company looks poised to be the first trillion dollar company that this planet has ever seen.

Put that number in perspective for a moment -- the entire U.S. economy, as measured by GDP, is $14 trillion right now. Assuming our great country can grow its standard 2%-3% per year, Apple's market cap would be equivalent to 6% of all the activity in the entire nation of the year 2015. That's a bold call; not sure if it will happen, but it'll be an interesting ride. But it's a good set up so let's dig into the top down and bottom up fundamentals as well as a little bit of technology business strategies like "lock in" and "switching costs" and see why I'm so adamant about Apple.

In top down analysis, we look at a sector/industry/economy from a forward thinking 30,000 foot, global view. In Apple's case, of course, that means I'm going to talk apps. Oh, and computers. But mostly Apple's future is all about apps and how its incredible products enable the masses to engage with the network and each other and their games and their videos and their music in ever easier, more efficient, more fun ways.

And see, Apple's incredible products are built upon Apple's closed end system which forces customers to knowingly "lock themselves in" to Apple's products and ecosystem forever. Once you start buying iPhone-enabled apps, once you master your Apple TV, once you sign up for any of Apple's subscription services including MobileMe, you're pretty much going to have to stick with Apple forever. You're locked in.

Luckily, you're locking yourself into what has consistently been the single best consumer tech platform for a very long time now. And if you're an Apple investor, you're lucky because locking people in now means you can always eek out more profits down the road; dancing on that fine line of eeking out every extra percentage point of profit margin form those locked in customers who don't ever want to have to leave you because the "switching costs" would be so high.

And the app industry itself is going to be the single biggest end market that Earth has ever seen. Nearly a billion customers will buy a cell phone every year within the next decade, and more than two billion total smart phone users out there using those app-enabled products. Just like the ones Apple's locking nearly a hundred million people into by the year 2015.

That should be awfully good for earnings prospects, no? So the top down analysis says this is a company that's uniquely positioned to profit from the fastest growing sector in the fasting growing industry in the largest market the world has ever seen.

Let's talk valuation and bottom up then. Apple's going to earn a total of about $15 per share in 2010. Street consensus for next year is just under $18 a share, but as the iPhones, Apple TV, and iPod touch margins continue to expand as the components and storage prices continue to drop, I figure we're looking closer to $20 a share or more in 2011. With nearly $50 per share in net cash on the balance sheet, we're talking about a stock that's trading at about a 10x forward enterprise value to earnings valuation. That's cheap, especially if earnings are likely to grow 20%-30% per annum for the foreseeable future too.

And as for the very near-term, Apple looks very ready to pop. Everybody you know is convinced our economy is double dipping at best and crashing at worst and the polls are once again back at historic lows and show bulls at about 20%. Apple TV is selling like hotcakes now that Netflix and Apple rentals are so easy to see on it and the price has dropped to $99 a pop. That's practically free when you consider that your monthly cable bill is likely much more than that. (And don't forget that all those Apple TV buyers of today are locking themselves into the Apple ecosystem once again for tomorrow.)

If estimates are too low for this quarter and for next year, and if the stock is already trading at cheap valuations, then that's a recipe for a big move higher.

long AAPL