bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple Inc. (nasd:AAPL) $162.83/span/span/bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”- Despite Apple shares rising more than 100% from its 2009 low of $78, the stock still appears to be attractively valued especially as a long-term holding. Using cash-flow and non-GAAP earnings, AAPL trades at less than 15x on a trailing 12-month basis. Since sales and cash flows were likely significantly depressed over that time period due to the sharp economic contraction, demand should improve considerably in the quarters ahead. Thus, forward multiples would be even lower given the anticipated rebound in sales and earnings growth./span/spanbr /divspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”The modest price multiple at which AAPL currently trades leads me to conclude that investors are: 1) Attributing the slowdown in Mac and iPod segments to a permanent secular decline, rather than temporary weakness consistent with economic contractions. 2) Ignoring/underappreciating the growth potential of the iPhone and products yet to be introduced. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Non-GAAP Earnings amp; Cash Flow: /span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple has reported $5.72 GAAP EPS for the past 4 quarters combined (ttm). However, over the same period, Apple has earned $9.23 in non-GAAP EPS (ttm). The non-GAAP figures are a better representation of Apple’s earnings power since iPhone revenues are recognized in the period sold and not deferred over a 24 month time frame as is the case with GAAP EPS. The GAAP EPS numbers grossly understate Apple’s profitability and cash-flow generation. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Looking at the difference between GAAP revenue and non-GAAP revenue for the past 4 quarters, GAAP revenue would be $7.7B higher, or 22.3% if Apple were not required to account for iPhone sales using the subscription method. Reported EPS (ttm) would have been $3.51, or 61.4% higher as well. The most noticeable difference is the effect iPhone sales have on profit margins. Since the iPhone carries the highest margin for Apple hardware, there is a dramatic impact on gross and net margins when subscription accounting is reversed. Gross margin rises from 35.5% to 39.6%, and net margin increases from 15.0% to 19.7%. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana, -webkit-fantasy;”span class=”Apple-style-span” style=”font-family:verdana, fantasy;”br //span/span/diva onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0ZCVmk8I/AAAAAAAAAkY/CdeljPnfkmY/s1600-h/Picture+105.png”span class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”img style=”cursor:pointer; cursor:hand;width: 400px; height: 255px;” src=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0ZCVmk8I/AAAAAAAAAkY/CdeljPnfkmY/s400/Picture+105.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5368840941763728322″ //span/span/adivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0ZCVmk8I/AAAAAAAAAkY/CdeljPnfkmY/s1600-h/Picture+105.png”/abr //span/spana onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0Y77-tYI/AAAAAAAAAkQ/7e3V_eVIokM/s1600-h/Picture+106.png”span class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”img style=”cursor:pointer; cursor:hand;width: 400px; height: 255px;” src=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0Y77-tYI/AAAAAAAAAkQ/7e3V_eVIokM/s400/Picture+106.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5368840940045645186″ //span/span/a/divdivdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0NvncdAI/AAAAAAAAAkA/PfZgHPgHvYE/s1600-h/Picture+108.png”img style=”cursor:pointer; cursor:hand;width: 400px; height: 90px;” src=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0NvncdAI/AAAAAAAAAkA/PfZgHPgHvYE/s400/Picture+108.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5368840747759727618″ //a/span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana, fantasy;”br //span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”span class=”Apple-style-span” style=”font-family:verdana, -webkit-fantasy;”span class=”Apple-style-span” style=”font-family:verdana, fantasy;”divGAAP Revenue (ttm) has increased 12.2% compared to the prior trailing 4 quarters, yet non-GAAP sales increased 29.7%, more than double the rate of GAAP revenue growth. GAAP earnings growth (ttm) versus the prior 4 quarters was 11.7% ($5.72 vs. $5.12). However, non-GAAP EPS (ttm) increased 66.3% ($9.23 vs $5.55) compared to the same period for the prior year./divdivbr //diva onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://3.bp.blogspot.com/_kaO6aTrkklM/SoS9FGiI0DI/AAAAAAAAAlA/NPqEV7-N-c0/s1600-h/Picture+115.png”img style=”cursor:pointer; cursor:hand;width: 400px; height: 265px;” src=”http://3.bp.blogspot.com/_kaO6aTrkklM/SoS9FGiI0DI/AAAAAAAAAlA/NPqEV7-N-c0/s400/Picture+115.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5369624551083266098″ //abr /br /a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoS9E7yXonI/AAAAAAAAAk4/ztmRIG3khzQ/s1600-h/Picture+116.png”img style=”cursor:pointer; cursor:hand;width: 400px; height: 270px;” src=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoS9E7yXonI/AAAAAAAAAk4/ztmRIG3khzQ/s400/Picture+116.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5369624548198556274″ //abr /a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://3.bp.blogspot.com/_kaO6aTrkklM/SoS9ETpv0hI/AAAAAAAAAkw/P0JVwxrvPaw/s1600-h/Picture+117.png”img style=”cursor:pointer; cursor:hand;width: 400px; height: 260px;” src=”http://3.bp.blogspot.com/_kaO6aTrkklM/SoS9ETpv0hI/AAAAAAAAAkw/P0JVwxrvPaw/s400/Picture+117.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5369624537424974354″ //a/span/span/span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana, -webkit-fantasy;”br //span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”span class=”Apple-style-span” style=”font-family:verdana, -webkit-fantasy;”span class=”Apple-style-span” style=”font-family:verdana, fantasy;”a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://3.bp.blogspot.com/_kaO6aTrkklM/SoS9ETpv0hI/AAAAAAAAAkw/P0JVwxrvPaw/s1600-h/Picture+117.png”/adivFrom June 2008 to June 2009, Apple’s cash holdings increased $10.35B, from $20.77B to $31.12B. On a per share basis, cash/share increased $11.38, or 50% from $22.85/share (June 2008) to $34.24/share (June 2009). Apple generated $10.26B in free cash flow over the last 4 quarters, or $11.28/share./divdivbr //divdivIt is clearly evident that the reported GAAP figures widely understates Apple’s true performance. Therefore, investors should focus on the non-GAAP numbers and cash flow when evaluating Apple./divbr //span/span/span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://2.bp.blogspot.com/_kaO6aTrkklM/SoH0NF-2EKI/AAAAAAAAAj4/Oyb7gya5z2E/s1600-h/Picture+109.png”/a/span/spandivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Valuation Metrics:/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Even though stock values reflect future cash flows, we can examine Apple’s performance over the last 4 quarters (ttm) to use as a conservative proxy since the recessionary backdrop has most likely depressed revenue and earnings. Apple’s GAAP EPS (ttm) of $5.72 translates into a historical P/E (ttm) of 28.5x. That would appear to be quire a rich valuation, especially given the multiple compression that has occurred in the overall equity market. Or, at least, imply significant future growth./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”However, investors should know that evaluating AAPL based on GAAP accounting is completely flawed. To compare apples to apples, investors must gauge Apple using its non-GAAP figures relative to peers/market. Apple uses subscription accounting methods to account for iPhone sales which spreads handset revenues over 24 months by accruing unrecognized revenue in a deferred revenue account that is stated on its balance sheet. Apple’s non-GAAP EPS (ttm) is $9.23 which equates to a trailing P/E of 17.6x. That is a stark difference than the misleading GAAP P/E of 28.5x. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Considering that Apple has $34.24/share in cash amp; securities that could theoretically distributed to shareholders, Apple trades at even a lower multiple based on non-GAAP EPS ex cash. If we strip out $34.24 cash/share from AAPL’s $162.83 share price, we are left with $128.59/share which essentially reflects the value of Apple’s operating assets. In addition, interest income must be stripped out of earnings before calculating a P/E multiple due to the assumption that the cash stockpile would be distributed, hence no longer contributing interest income to EPS. For the trailing 4 quarters, Apple earned 33 cents per share (after-tax) in interest income. Apple is trading 14.4x ex-cash (ttm) based non-GAAP EPS ex-interest income of $8.90./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”When there is a large disparity between interest yield (interest income/cash) and earnings yield (EPS/Price or 1/PE), the large cash balances can skew the value of the (non-cash) operating assets. When short-term rates were over 5% (pre-tax) and Apple traded at 20+ multiple, the earnings yield was roughly equivalent to the cash yield. Therefore, there was little or no difference between the standard P/E and P/E ex-cash amp; interest. Now that current short-term rates are near zero, Apple’s cash holdings contribute very little income to total company earnings. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/diva onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0M85aZ-I/AAAAAAAAAjw/ubSCl2swCi0/s1600-h/Picture+110.png”span class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”img style=”cursor:pointer; cursor:hand;width: 316px; height: 171px;” src=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0M85aZ-I/AAAAAAAAAjw/ubSCl2swCi0/s400/Picture+110.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5368840734144882658″ //span/span/a/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”If Apple used its $31.1B for a stock buyback, it could reduce share count by 191M to 718M. Non-GAAP EPS (adjusted for interest income) would rise to $11.21 translating into a P/E (ttm) of 14.5x. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”In the past year, Apple’s cash position has increased by $10.35B or $11.38/share giving a P/CF (ttm) of 14.3x. Trailing free cash flow was slightly less at $10.26B giving a P/FCF (ttm) multiple of 14.4x. Removing the value of cash and interest income (from share price amp; FCF), the P/FCF multiple drops to 11.7x./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Recall that this valuation exercise has been based on historical earnings, not expected future earnings which is more appropriate since investors only care about future cash flows. However, I used trailing earnings since those figures are known while future earnings are not. I am confident that Apple’s next 4 quarters will be better than its previous four. The economy has been in a deep recession for the past year, but has begun to improve. Apple has managed to withstand the downtown reasonably well; and with the success of the iPhone/App Store along with the possibility of new products, Apples growth should accelerate moving forward. Thus, I am reasonably confident that Apple’s valuation multiples are even lower on a prospective basis./span/span/div/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0M85aZ-I/AAAAAAAAAjw/ubSCl2swCi0/s1600-h/Picture+110.png”/abr //span/spana onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0M0sqOQI/AAAAAAAAAjo/h06pe8obfzk/s1600-h/Picture+111.png”span class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”img style=”cursor:pointer; cursor:hand;width: 249px; height: 307px;” src=”http://1.bp.blogspot.com/_kaO6aTrkklM/SoH0M0sqOQI/AAAAAAAAAjo/h06pe8obfzk/s400/Picture+111.png” border=”0″ alt=”" id=”BLOGGER_PHOTO_ID_5368840731943909634″ //span/span/aspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Price Implied Expectations:/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Trading for less 15x trailing earnings and ~12x expected earnings, AAPL on the surface appears cheap. Historically AAPL has traded at much higher valuations, yet expected growth was much higher too. In addition, investors are demanding a higher required rate of return on equities by paying lower price multiples. The increase in equity risk premium inherent in all stocks has led to the decline in P/E ratios. Investors perceive greater risks and are less sanguine about the long-run prospects of equity returns. This accounts for a portion of Apple’s low valuation relative to its historical premium. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”The primary reason why the investors are assigning a paltry price multiple is due to expected declines in Apple’s growth rate. In my opinion, the current share price reflects the expectation of Mac growth commensurate with the industry average, declining iPod growth, and iPhone growth that will peak and rapidly decline to the industry average in a couple years. In short, Apple is priced as if its growth is quickly maturing, such as MSFT or DELL who both saw their margins compress as growth stalled. All firms eventually fall victim to the industry/firm life cycle. However, is this expectation likely for Apple’s future? That is the key question. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”I don’t believe that overly optimistic or unrealistic expectations are priced-in AAPL shares. I believe the current outlook implied by the share price is conservative, but not entirely unlikely. The future of Apple’s growth hinges on innovation and new products/services, as it does for most firms. Many firms are unsuccessful at being able to continue to innovate, staying relevant and avoiding being commoditized. In short, Apple’s share price doesn’t give much value to its ability to innovate and reignite growth. In my opinion, it’s the belief whether or not Apple can continue to introduce products that wow consumers that determines if AAPL is over/under valued./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple’s Record of Successful Innovation and Execution:/span/span/b/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”1)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”iPod’s Dominant Market Share- /span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple’s unit market share has exceeded 70% in the U.S. for years as it has successfully continued to ward /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”off competition leaving carcasses by the wayside. Many powerful companies such as Dell, Sony, and /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Microsoft have attempted /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”dethrone the iPod only to fall short or outright fail. Apple has been able to keep /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”iPod /spanspan class=”Apple-style-span” style=”font-size:x-small;”prices relatively high as its revenue share of the U.S. PMP market is higher than 90%./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”2)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple’s iTunes store is largest music retailer-/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Tunes surpassed Best Buy and Wal-Mart to take the top spot is sales volume. Apple should increase its lead /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”as bricks and mortar stores cutback on music selection due to high inventory cost and required floor space. /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Demand for physical music continues to decline as consumers shift to buying digital music online. /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Competitors /spanspan class=”Apple-style-span” style=”font-size:x-small;”have followed with online music download stores, yet they have made little dent in iTunes /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”market share./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”3)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Retail stores generate highest revenue/sq.ft. and foot traffic-/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”It’s quite indisputable that any retail strategy has been as successful as Apple’s retail stores. Apple leads in /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”performance metrics such as revenue/sq.ft. and visitors/store etc, but its retail strategy also has been /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”extremely successful in promoting its brand and introducing customers to its products. Other computer /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”makers’ retail efforts have failed, such as Gateway and Dell. Many third-party computer and electronics /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”resellers have also disappeared, such as CompUSA and Circuit City. It’s quite evident that it’s a very /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”challenging environment to navigate. Apple continues to open /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”new stores and is expanding considerably /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”abroad./span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”4)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Turn-around of Mac business and domination of premium segment:/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Mac unit sales increased 38% in FY08 and 40% in FY07, which was more than 3x the PC industry as a whole /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”outpacing the industry in 18 of the last 19 quarters. Even though Mac unit growth has slowed to single-/span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”digits, /spanspan class=”Apple-style-span” style=”font-size:x-small;”its share of the premium price segment has exploded. According to NPD, Macs made up 91% of /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”sales for PCs /spanspan class=”Apple-style-span” style=”font-size:x-small;”priced $1000 and above for June 2009, up from 88% in May. This compares to 66% share /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Mac had in Early 2008. /spanspan class=”Apple-style-span” style=”font-size:x-small;”I believe Apple had about 40% share of the premium market in 2007. It is quite /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”evident that Apple is the only PC /spanspan class=”Apple-style-span” style=”font-size:x-small;”manufacturer than can command a premium for its products. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”5)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Large and increasing share of smartphone market-/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Even with the experience and industry footing incumbent mobile handset makers possessed, Apple was /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”able to /spanspan class=”Apple-style-span” style=”font-size:x-small;”enter the market and quickly gain share. According to several surveys, the iPhone has the highest /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”satisfaction /spanspan class=”Apple-style-span” style=”font-size:x-small;”rates by a /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”considerable margin. Industry competition is very intense, yet Apple is the one to /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”catch in the /spanspan class=”Apple-style-span” style=”font-size:x-small;”smartphone segment. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”6)/span/span/bspan class=”Apple-tab-span” style=”white-space:pre”bspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/b/spanbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”iTunes App Store-/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”One year after launching, the iTunes App Store offers 65K applications and has seen over 1.5B downloads. /span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Other firms have followed with their own mobile app stores, yet haven’t been able to duplicate nearly as /span/spanspan class=”Apple-tab-span” style=”white-space:pre”span class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;” /span/span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”much developer and consumer interest. Nintendo mentioned last quarter that Apple’s App Store is /spanspan class=”Apple-style-span” style=” white-space: pre;font-size:x-small;”i/span/spanspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”mpacting its handheld gaming business. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”These remarkable achievements illustrate a common theme. Apple has been able to enter new product markets and become the leader that others must chase. Even though many competitors have attempted to duplicate Apple’s strategy, most have had hardly much success, at least in terms of stealing business from Apple. A popular concern among Apple investors is that increasing competition from the number of firms following in Apple’s footsteps. They believe that others will eventually catch Apple (iPhone, App Store, iTunes Music),hence its lead is only temporary. However, this has been a concern for ages and yet to come to fruition. That is not to say it won’t happen as there is a real possibility that it will eventually. But given Apple’s proven track record of disrupting, dominating, and defending its new endeavors, it’s likely Apple will remain the innovative leader for sometime. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple’s share price may reflect declining iPod growth and decelerating Mac growth, but it doesn’t reflect potential new products which are a certainty. The success of those new products are less certain, but Apple makes products/services that complementary to its others, rather natural extensions. Basically, Apple products help drive sales of other products as well as increasing switching costs creating customer “lock-in.”/span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Apple’s products elicit the some of the highest customer satisfaction scores for their respective categories which has created immense loyalty and a powerful brand. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivbspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”Conclusion:/span/span/b/divdivspan class=”Apple-style-span” style=”font-family:verdana;”span class=”Apple-style-span” style=”font-size:x-small;”On a non-GAAP basis ex-cash, Apple is trading at less than 15x trailing EPS. Considering the economy has been going through the worst economic downtown since the Great Depression, Apple’s trailing earnings are depressed. As the economy turns up, earnings will normalize at a higher level. In addition, iPhone sales should continue to exhibit strong growth and drive free cash flow. Therefore, investors should be highly confident that future earnings will be considerably higher. On a forward earnings basis, AAPL’s price multiple is 10-12x, a valuation representative of maturing growth. However, Apple has a long track record of innovation and using products to promote and attract consumers to its other offerings. Looking at the many remarkable achievements by Apple any the many stumbles by competitors, it can be argued that AAPL deserves a premium multiple, not a multiple reflective of ordinary growth. /span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana, fantasy;”span class=”Apple-style-span” style=”font-size:x-small;”br //span/span/divdivspan class=”Apple-style-span” style=”font-family:verdana, -webkit-fantasy;”span class=”Apple-style-span” style=”font-size:x-small;”iDisclosure: Long AAPL/i/span/span/div/div/divdiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/2991101600248617596-7181346505083979438?l=financial-alchemist.blogspot.com’ alt=” //divdiv class=”feedflare”
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Last 5 posts by Turley Muller

• Apple Inc (AAPL): Weaker Dollar Will Benefit Revenue Growth and Margins - November 3rd, 2009
• Apple Inc (AAPL): Q4 2009 Estimates - October 19th, 2009
• Apple Inc (AAPL): iPhone's Substantial Impact on Gross Margin - July 29th, 2009
• Apple Inc (AAPL): Examining the Prospects of a Low-Cost iPhone - March 5th, 2009
• Apple Inc (AAPL): Snapshot- Apple's Cash Growth - February 23rd, 2009