It seems to be. Apple is the portfolios of 21 gurus we track, mutual fund and hedge fund types alike. Among them, Mark Hillman bought 70,072 shares in the quarter that ended on 09/30/2010, which is 4.62% of the $431 million portfolio of Hillman Capital Management. Daniel Loeb bought 150,000 shares in the quarter that ended on 09/30/2010, which is 4.46% of the $954 million portfolio of Third Point, LLC. Andreas Halvorsen bought 269,000 shares in the quarter that ended on 09/30/2010, which is 0.83% of the $9.24 billion portfolio of Viking Global Investors LP. David Einhorn owns 837,500 shares as of 09/30/2010, an increase of 168% from the previous quarter. This position accounts for 5.91% of the $4.02 billion portfolio of Greenlight Capital Inc. Steve Mandel owns 2,707,106 shares as of 09/30/2010, an increase of 20.26% from the previous quarter. This position accounts for 6.75% of the $11.39 billion portfolio of Lone Pine Capital. George Soros owns 247,584 shares as of 09/30/2010, an increase of 13.43% from the previous quarter. This position accounts for 1.05% of the $6.69 billion portfolio of Soros Fund Management LLC.
During an interview with Charlie Rose, David Einhorn, one of the best hedge fund managers of our time, answered the question from Charlie about Apple:
Charlie Rose: So you like Apple.
David Einhorn: Very much. Apple is an interesting company because it has arguably one of the best brands in the country. It's growing at an enormous rate. And the growth effectively feeds on itself because when you buy one Apple product, you want to buy another because they're so nicely compatible. The result is that businesses, which for a generation essentially avoided Apple products, are adopting them now because of the demand from the employees. They come in with their iPhones and they say, "I want you to support this with my e-mail." That's a powerful growth story. With the introduction of the iPad, it's sort of reaching a critical mass right now.
It is no doubt that Apple has had the greatest growth. As seen in the 10-year financials of Apple, its revenue has grown 30% a year in the last decade:
On the top of that, its profit margin grew 20% a year, thanks to its brand building and name recognization.
Compound with both of the revenue growth and the expansion of profit margin, its earnings grew 60% a year in the past 5 years. Therefore it is not surprising that the stock has appreciated many times during the past decade.
With a market cap of close to $300 billion, second only to XOM, if Apple stock price does what it did in the last dcade. It would be a trillion dollar stock. Wish US government has a few of that.
So how is Apple evaluated by the market? Is it overvalued?
If we plug AAPL into our DCF Calculator, and use the half of the earnings growth rate of Apple Inc. over the past 5 years, it shows that AAPL has a fair value of about twice of what it is now. But remember, this assumes that Apple will deliver 30% earnings growth every year in the next decade.
If we look at the 10-year valuation history of APPL, we get the chart below:
If we click on the legend of the chart in the 10-year valuation page, we get where the prices are relative to historical P/E bands:
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We can see that the stock price of Apple is closer to its 10-year low P/E of 16, and relative far from the 10-year P/E high of 41. So it seems to be at its low end of valuation as measured by P/E.
If we hide the P/E and P/B bands by clicking on the legend of the 10-year valuation chart, we get where the stock prices relative to historical P/S band:
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Because of the profit margin expansion, the price of APPL is at the high end of the historical valuation, while the P/E is at the low end of the historical valuation.
So is Apple stock expensive?
With what we observed from the DCF calculator and the historical valuations, AAPL seems to be fair-valued if the growth trend in the revenue and profit margin continue in the future years. What is the probability for that to happen? We don’t know. If we look at the history of Apple as a company, the role of its CEO Steve Jobs is one of the most important factors in the company’s growth. Thinking all of these, an interesting question to ask is, would you believe that we will see the first trillion dollar ($1,000,000,000,000) company in the next decade?