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It is almost disturbing how high the market has run up in the last few weeks, feels very bubbly to say the least. I am not very comfortable with valuations of most of the companies I held this morning so I organized a reshuffle which I will detail later tonight...But here is my take on one of the everyone's favorites.

You know I am somewhat surprised by the number of people in the SLO contest that hold Apple stock. Don't get me wrong, I think AAPL is a great company with unmatched products, shrewd management and loyal customers but, at the time of this writing at $171 a share, I personally do not believe that the risk/return tradeoff for this stock (not a company) is favorable. It is quite possible that given some luck and momentum, the market could carry AAPL another 5-10% higher, but at this price just as easily any negative news could easily lead to a gap down that could be quite severe.

Here is some food of thought and some questions that I was asking myself recently after reviewing AAPL's financials and various reports out there:

Positives:
- PC units shipments are very strong in general- 12% in 2007 and 11% projected in 2008
- Macs are the main value driver- growing at 20% y-o-y but with total revenues for PC unit projected at roughly $10B one can argue that the unit is not worth as much as the entire DELL Corp with $50B in Enterprise Value.
- Currency benefit- 2-3% in Sept quarter?
- $13B in cash? Potential stock buyback or dividend combined with a split to enhance liquidity?

Negatives
- iPhone vs iTouch cannibalization? What would be the impact of longer term pressure on iPhone from the iTouch? Revenue from iPod in general is flattening out at roughly $8B a year. Any unit growth could be offset by price declines.
- Deferred revenues for iPhone- over hyped impact on the actual financials? Revenues will be deferred and amortized over the life of the contract with AT&T?
- What would be the gross margin impact on AAPL of higher DRAM and Flash pricing? Most analysts are expecting margins around 31% could this be a source of short term underperformance?
- Another potential source of short term underperformance is the delay of Leopard OS?- According to many reports Adobe has not yet received a beta version for testing which puts in question the projected launch in November
- Slower speed for EDGE network could provide disappointment in Europe? Competing against 3Gs Nokia and LG?
- Growth in US has been driven predominately by branded stores- only handful of stores in Europe?

What ifs:
- appleTVs could generate demand in a whole new category? Expected introduction Q1 2007? What's the upside?
- gPhone potential competitor? What is the impact?
- Steve Jobs subpoena? What is the possibility of him losing the job? Even if it is small is it priced in the stock?

As far as valuation goes with only $4B in projected net income for 2008 we are talking about a hefty 35 P/E with EV/EBITDA of 17 times. In order to justify this multiple AAPL has to grow of at least 20% for the next 5 years to make the purchase reasonable for my demanding eyes.

As far as the fictional sum of the parts goes here it comes:
PC Unit- value no more than DELL= $50B
iPod with iTunes- value no more than the entire Sony Corp=$50B
iPhone no more than a 1/3 of RIMM based on the number of subscribers of 2M vs 11M growing at roughly the same unit value or roughly=$20B
So even this very rough and generous total comes out to roughly $120B which is a 20% discount to today's price
Trade safe and cheers,
Vad
VYazvinski@gmail.com