Apple: Plenty of upside over the long term

Investors should remain patient and focus on long-term fundamental value.

By TheStockAdvisors Apr 17, 2012 12:07PM
Apple logo copyright Beck Diefenbach/ReutersBy Nate Pile, Nate's Notes

I believe there is still plenty of room left on the upside for Apple (AAPL) over the next several years.

At this stage of the game, Apple is setting the pace in virtually every category in which it competes.

The tech giant's ability to dictate the terms of engagement for anyone else who wants to compete in the sector is an advantage that Apple is going to maintain for many product cycles to come. And its large cash position and history of success put it in a position to hire the very best talent when it comes to identifying new markets and developing new products and services.

In addition, the company's large size and incredibly high reputation for quality and attention to detail make it easier to establish market share quickly once it has made a decision to "go there" (wherever "there" happens to be).

To be sure, however, it would be foolish to pretend there are not risks. There is always a chance that one of Apple's current competitors (or a new one that hasn't even appeared on the scene yet) will find a way to do something better than expected.

Change is the one constant when it comes to technology. But again, into at least the foreseeable future, Apple seems to be ahead of the curve rather than behind it.

Apple is really the only major company that is in control of both the hardware- and software-sides of its products, and it seems reasonable to me to assume that while the risk of a surprise competitor is always possible, Apple is still looking pretty good on this front.

Another "risk" would be some sort of "scandal," such as the spotlight on the company's working conditions in China. But for now, it appears to me that Apple is addressing the issue in a matter that is entirely appropriate.

So where does all this leave us? First off, I think it is important to recognize that history strongly suggests that even in a broad sell-off, it it shouldn't take long for the stock to find support from honest-to-goodness value investors.

Secondly, though the stock is more than overdue for a pullback (or at least a cooling off period of some sort), trends often go on far longer than seems reasonable.

Indeed, AAPL could eventually get to "ridiculously overvalued" levels before the bull market actually comes to an end; history provides plenty of precedents that suggest a stock like this could trade north of $2,000 per share in a "perfect storm" of a bull market.

The most recent run has seen the stock rally roughly 75% in a little over four months (and thus it is more than overdue for a psychological pullback of some sort). But given the manner in which Apple has been able to grow sales and earnings, it is fairly difficult to find valuation models that suggest the stock is "way overpriced."

While a few models suggest the stock might be trading at a premium to fair value, a number of other traditional measures suggest that the stock is actually still undervalued.

Apple was first added to our model portfolio at $6.78 on March 13, 1998. If you are feeling anxious about the size of your Apple position, I would not object to you taking a few chips off the table; however, you are encouraged to be as patient as possible. And if you do not yet have a position, please start one at the first opportunity.

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