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Ahknaten doesn't like AAPL

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Sell Apple.

Using eVal, I created a DCF model of AAPL. For sales growth assumptions going forward for the next two years, I used the sales growth estimates from analysts of 64.8% (this year) and 17.9% (year after). Surprisingly, by taking just the defaults in eVal and using those growth estimates, and a cost of capital of 8%, I was able to get EPS estimates of $3.73 and $4.41 for the next two years that were very close to the analyst estimates of $3.74 and $4.41, but there were obvious problems with that valuation model. Although it produced a stock price estimate of $160, which would indicate that AAPL was undervalued, the terminal ROE in the model was at 20%. I really doubt that AAPL will be able to sustain a ROE of 20% forever. So, I made some more modifications to the model. My thought was that perhaps some analysts were doing very simple valuations like the one I had just done, and in my opinion... that method was too optimistic and faulty. I reworked the numbers to adjust my terminal ROE, by increasing the COGS/sales, R&D/sales and SG&A/Sales just a bit so that a terminal ROE of 8% was reached. The terminal sales growth was kept at 5% so that it could reflect the long-term GDP growth rate. After I did that, the earnings estimates for this year and the next year fell, but I was hoping that I could at least match that of the analysts. So, for this year and next year I lowered the COGS/sales, R&D/sales, SG&A sales and even the tax rate to 5 year historical low levels. I was unable to get an EPS estimate that matched that of the analysts. Maybe I just screwed up. Who knows? But after doing all of that, my estimated price/share was only $75. In other words, I think it's possible that they will not meet estimates and the stock is overpriced.

There were some other 'negative' factors that I found interesting. There was some insider selling lately. The last time I could find any insider buying was back in May-July '06 and those insiders timed it nicely. I found it interesting that AAPL had consistently beat earnings and although that's usually a good thing, I had to wonder... will they take a 'big bath' soon? I don't know. It's just something that I think about. I noticed it had a high price/book, high price/cash flow and a high PE and although it had high growth, I had to think... could it really sustain that? I dislike high PE, price/book and 'hot' growth stocks, so these numbers bothered me.

Here's the thing about AAPL. You'll see these blogs and newsletters talk about AAPL, but do you also notice that they start talking about it after the stock rose 180% in two years? Doesn't it make you wonder if folks are just trying to ride on the momentum? That momentum strategy can work sometimes, but sometimes I think folks are just a bit too late to the party. I held AAPL in my virtual technology fund, I bought it in Jan '04 at $11 and then I sold the holdings in Nov. '06 at $79. Alright, so I never made it to the current level of $140, but I was into this long ago and made some returns and bought some other stuff. Ever wonder what institutions are doing? Take a look at block-trades and lets assume that block trades are a proxy for institutional buying. What do you think they've done in the past few months? Are they lower? Now, look at non-block trades and presume that the average investor buys those, are they higher in the last month? Are they higher? Could it be an interesting guess to presume that more institutions might be selling the stock than buying? Just a guess. And could it be reasonable to assume that perhaps that those institutions hope this momentum continues so they can unload their shares?

Watch out for AAPL. I do not think it's a good buy at these levels. You're going to see a lot of hype and blogs talking about AAPL as if they're pitching a product and not a stock. Sure, the iPods are great and fun and cool, and perhaps that's a good reason to buy the stock. I dunno. But, I'm not confident with it and although some in this competition hold it, I wouldn't hold it. So that's my contrarian viewpoint. Sell AAPL and buy something else like GIB, CSC, XRX, NOK, CHT or TMX.

Comments (1)

don ferk:

Unka Ankh,
I don't know Y IPB's would Re-Publish your
Sept 14, 2007 AAPL Burner Blog. PerHAPS, it's like 20/20 HIND[sigh]T. If I knew then what I know NOW - Typ(E)-O THANg.

So, with the Courage of Kon-viction % Strenght of IMagiNATION.

I will RETRO-spect-ively Re-PRO-D(e)uce my
supporting Ko(M)ment to a PRE-vious Blog of youRS - DOWNgrading AAPL.

ToWit :-

don ferk:
Ahknaten,
Good Show! Well Done. Your the King Tut of this Contest - a "Ra" of light in this Anne McCaffery "Left Hand Side of Darkness" Universe.

THIS One's between You & Me and the Deep Apple Blue Sea----

___I remember the Halcyon days of Apple - Steve "The Woz" Wozniak ( who invented the Operating System (OS) and called it OmniMon),The Apple II, the memory that ran so hot you had to get an electronic "refrigeration' device to cool it down to prevent self-destruction.
___The Nerds at Apple got so rich that they lost sight of "The Dream". Woz quit, So did Jobs. What happened was ugly. With new-found wealth Management & Staff started to engage in Bizarre Bad Behavior - They started having 'Office Romances' - sleeping with Co-workers. Jealousies and Organizational Dynamics ( aka Office Politics ) and hatreds from broken-off love affairs and back-stabbing revenge from when your love interest's next love interest set in. Apple self-destructed. Jobs ccame back as the White Knight to restore Moral order and Work Ethic. It worked. See the results. Apple's "Beatle" Rainbow Apple logo is now a Blue,blue Apple. This may be emblematic of an new 'recidivism' at Apple,Inc. Where is the Wizard of Woz,now, I ask.
--- Europe isn't "buying the latest 'gadget' gizmo thing. The 'roaming' charges are scandalous. Competition is a Hell-hound nipping an inch from their on-the-run Buttocks.
---In your analysis you talk about R&D expenses. In High-Tech these capitalized costs are not always recovered by the product, which rapidly becomes obsolete. They are held on the Books as R&D 'Assets' but are really non-cash write-off liabilities for the Future. They killed Cray Research, crippled Sun MicroSystems, etc. etc.
Maybe you should consider the Time-Bombs in some of these Big Mo plays, like Apple, There is also the "coupon" problem, Microsoft, incuurred Billions in liabilitie to get the Windows XP out the door by Christmas - putting out a flawed version and guaranteeing "replacements" or low-cost upgrades when the next-best-thing came out. Problems DELAYED are NOT problems SOLVED -- that is VW's Time-Bomb Theory for Bankers & Hackers & Slackers.
----Hope this helps - maybe I'm just "enabling" you with re-inforcement. Take it or Leave it, I say. With Respect, Don Lee Ferk ( aka VikingWarrior ) SLO-Port : RuthLessIntent.

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