Will Apple Impress? Yes. Will It Matter? Nope.

Is this Apple (Nasdaq: AAPL  ) report half-full or half-empty? The answer very much depends on what you expect out of the gadget guru's third-quarter report Tuesday night.

First, the bullish case
There is no doubt in my mind that Apple will blow Wall Street's average earnings target out of the water. For one, the company is on a 25-quarter streak of straight outperformance reports. For another, cheery reports out of suppliers like Intel (Nasdaq: INTC  ) point to unusually good news -- even by Apple's lofty standards.

Apple is widely expected to have sold at least 4.5 million iPhones, 10 million iPods, and 2.4 million Macs this quarter. The standout performer is naturally the iPhone, with more than 1 million iPhone 3GS handsets sold in its first weekend on the market. A year ago, the iPhone shipped just 720,000 units in the third quarter.

That's great news, since we also know that the iPhone is a high-margin beast that drives Apple's profits like Evel Knievel on a caffeine IV drip. Smartphones are where it's at now: Apple and BlackBerry maker Research In Motion (Nasdaq: RIMM  ) make mincemeat out of most rivals' gross margins. For example, Motorola (NYSE: MOT  ) collects gross margins that are within 5% of notorious low-cost retailer Wal-Mart (NYSE: WMT  ) . Apple likely doubles Wal-Mart’s haul with the unstoppable iPhone.

So Apple is growing in all the right places, raking in cash hand over fist. Surely that's good enough to support a premium-priced stock?

Then the bears attack
Heck, no (and stop calling me Shirley!).

Apple's stock is trading at about 27 times trailing earnings. In order to justify that kind of premium, the company needs to continue high growth rates well into the future. And sure, Apple has been running well above a 27% growth rate (for the PEG ratio fans out there) since its iPod-fueled rebirth in the early 2000s, but the company is also growing up quickly.

Do you really believe that Apple will double its earnings in three years, or triple them in five? With $5 billion in trailing earnings, Apple is already swimming with the big boys of the business world. If you triple that massive growth base, Apple would skip ahead of current earnings at Wal-Mart, Procter & Gamble, and Big Blue IBM (NYSE: IBM  ) . Not bloody likely, mate.

The share price has doubled in six months while the S&P 500 benchmark settled for a leisurely 17% recovery. I believe that Mr. Market has created an overvalued monster here, and this report would have to be mighty good indeed to support this lofty valuation. I have better ideas for the smartphone-hungry investors out there.

An Apple a day keeps the long-term gains away! (Don't agree? Feel free to discuss below.)

Further Foolishness:

Apple is a Motley Fool Stock Advisor selection. Intel and Wal-Mart Stores are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (16) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2009, at 2:23 PM, accelerando wrote:

    who knows where apple will go this week. absolutely no one. but for a company likely to carve a huge share out of the immense smart-phone market, who owns the digital music market, who is, in all likelihood going to grow its share of the home computer market and is more likely than any other company on the planet to come up with the 'next big thing', its current valuation is a small fraction of its true risk/reward value, imho.

    Apple is, without doubt, the premium corporation of our era, maybe of any era -- has the best of the best in every department, management to make it all work and an innovative streak completely absent from all other companies remotely its size.

    Apple to 1000 and beyond.

  • Report this Comment On July 20, 2009, at 2:38 PM, kkrimmer wrote:

    I bought in at $78 and again at $119 and again at $132 but decided to pull the plug at $151.

    I agree that it might go a bit higher (pundits at $158 for months now). But not going for previous high $180s, that was partly the bubble's boost.

    Still a 110% Apple fan/user.

  • Report this Comment On July 20, 2009, at 2:44 PM, answershmancer wrote:

    Your assumptions about the implications of Apple's trailing P/E, which you say is 27 are rather stupid. Anyone not taking iPhone amortization and cash on hand into consideration when quoting such a figure is really too ignorant to be advising others.

  • Report this Comment On July 20, 2009, at 2:54 PM, vzangla wrote:

    Dear Anders Bylund ,

    Is there something better out there?

    You mentioned Intel (INTC) they trade at a PE ratio of 42!

    What's their growth potential?

    What does "growing up quickly" mean? I think it adds fluff to your article and cheapens the content.

    The fact that AAPL is sticking and holding above 140 in this scared market is phenomenal.

    If people don't get in soon then they'll just be watching the show when it's priced just like GOOG.

  • Report this Comment On July 20, 2009, at 3:03 PM, asadkhan64 wrote:

    I wonder if Bylund can read an earnings report and totally agree with comments from answershmancer. Apple's cash flow today is $10 Billion a year (nearly twice its profits), due to how the iPhone earnings are accounted for. That is over $10 a share, which at a conservative 20 times should command a price of 200. I am sick of all these "analyts" trying to bring the price down by their faulty analysis. I am also sick of everyone quoting $78 as a some kind of price reference. Yes, Goldman Sachs went down to less than 50 when the market crashed. Does that mean that they are overpriced at 160 now because the stock has more than tripled? I haven't heard anyone mention that.

  • Report this Comment On July 20, 2009, at 3:53 PM, zarecom wrote:

    The author of this text is an idiot cause NO ONE LOOKS AT TRAILING EARNINGS!!!! Those are past earnings that no one cares, Wall Street only cares about future earnings which for Apple are going to be 6.4 EPS for 2010 and it is 23.5 times earnings. Second of all, PEG is at 1.54 and until the PEG goes above 2, the stock is good buy. Third, in the technology industry multiple is 23.6 which is higher than of Apple's although Apple is the Company that is one of the best on the market right now. Also, annually Apple's growth is at 36.3 % which is much better than 14.5% of the technology industry. Mr. Anders Bylund is probably shorting Apple so that's why he wrote this type of article or he just likes to see how people think that his opinion is valuable but everyone who sold the Apple today made a mistake. We are again in the Bull Market as you can see if you know how to look at the graph and the volume and the Apple will be one of the leader together with IBM, Intel and Goldman Sachs. Investors, read everything what people write, but make your own decision if the article is right or wrong. Mr. Bylund is probably just a writer, not an investor and he is good in writing articles, not in investing. He proved that by giving us information about Apple's past earnings. This is first respond that I wrote ever, but I was wondering why Apple went down and by reading this article I realized why. I am mad that people like Mr. Bylund gets opportunity to write very important articles when he does not know what he is talking about. Apple is going to continue to grow because they will expend their market to China and also after their contract expires with At&T in 2010 they will gain more market share. Everyone knows that IPhone is the best phone on the market. Nokia is losing the battle against Apple, do you think that Rimm and their Blackberry can survive against Apple?

    Wall Street Investor

  • Report this Comment On July 20, 2009, at 4:47 PM, TMFEditorsDesk wrote:

    Ummmm... Just to point out, the global GDP is around $60 trillion, so I think you might want to double check that $700 trillion figure.

  • Report this Comment On July 21, 2009, at 12:44 AM, tmuller2 wrote:

    Major problems with this analysis. Amateur mistakes-

    First, trailing PEs don't mean jack, the market is forward looking, and stock prices are a reflection, rather a function of future cash flows.

    Second- iPhone revenue is spread out over 24 months. Thus, EPS doesn't reflect revenues already earned since it's deferred even though Apple takes in the cash.

    In addition, the iPhone is basically the most profitable hardware product by far, with gross margins of 55% plus, compared to 30% plus for iPods and Macs.

    On a trailing basis, Apple's annualized cash flow per share have averaged $10+, and should increase significantly with the continued success of the iPhone. Therefore, on a forward looking basis, Apple could rake in $11-13 cash flow per share, so at $150 it's hard to argue its overvalued @ 14x.

    Also consider the $33/share in cash. If I you strip out that from the share price, $120 you have to strip out interest income too, which isn't much anymore, so cash flow would still be above $10. meaning the the TRUE multiple apple is trading at is closer to 10x.

    NOT 27x.

  • Report this Comment On July 21, 2009, at 9:53 AM, beetlebug62 wrote:

    Don't forget Anders Bylund is the Fool, who also was the source of the rumor that T-Mo's G1 Android phone had pre-orders of 1.5M, based upon some faulty assumptions.

  • Report this Comment On July 21, 2009, at 10:36 AM, kpinvest wrote:

    And the Apple fanboys come out in numbers, lol.

  • Report this Comment On July 23, 2009, at 12:06 AM, tomd728 wrote:

    I'm with the "forward" bulls on AAPL for all the reasons cited and could not agree more on the irrelevance of traling P:E.

    Cash is king and AAPL is a cash machine rarely seen in our time and for now beyond.

    If one thinks that AAPL is a story that is limited to the current product mix then most certainly you would jump off here but you will be missing one heck of a show in growth from this group of developers.

    Tom

  • Report this Comment On July 23, 2009, at 2:09 PM, PSU69 wrote:

    Win the race looking in the rear view mirror? AAPL got pounded down unfairly with all the press kids focused on Steve's health PLUS the MARKET illness. Imnsho, this article was shallow. FOOLISHLY written. AAPL is a cash machine and the iPhone is adding a new dimension to the wrecking ball mass. Writers should look ahead based on factual assessment of the global landscape. This article is buzzword yammering by a person who spanked out something to fit a time slot. Just a hunch?

  • Report this Comment On July 25, 2009, at 7:59 AM, wuff3t wrote:

    There are some bizarre and ill-considered comments in response to this article, along the lines of "Looking at trailing P/E is stupid...trailing P/E is irrelevant...AAPL is a cash machine..." etc.

    Leaving aside the fact that trailing P/E is far from irrelevant and that future P/Es are based on guesswork, what are people basing the view that AAPL is a cash machine on? Past performance, surely? You can't have it both ways - either the past is a useful indicator of the future or it isn't. The P/E can be a sketchy tool to use but at least a trailing P/E bears some relation to how much money a company has actually earned; forward-looking P/Es are often little more than wishful thinking.

  • Report this Comment On July 26, 2009, at 3:37 AM, EnvestorFirst wrote:

    $AAPL has really faired well since we first mentioned the issue a few weeks ago when it was trading at $138. We have been more than pleased with the performance. Few brands have a name like AAPL but yet still have opportunities for ongoing market penetration.

    July 22 (Bloomberg) – Apple Inc. jumped 3.5 percent in Nasdaq trading after price cuts attracted more first-time buyers for Macintosh personal computers last quarter, helping sales and profit top analysts’ estimates. LINK

    With only 20 odd percent of the PC market penetration pricing really will be a big profit driver for a company that many like but currently may not be able to afford their products. It really points to a very rare opportunity for such a well known organization. Check out the original article, http://themarketorder.com/2009/07/22/the-big-apple/

  • Report this Comment On July 27, 2009, at 3:32 PM, Intlinvstr4life wrote:

    I like daddy mac and its products. I just don't trust a market that seems fixated Mr. Job's personal life.

  • Report this Comment On July 28, 2009, at 7:10 PM, G44ca wrote:

    Those that consider Apple overvalued will change their tune once Apple delivers it's universal e-textbook as the foundation for Apple University and once it has many of the world's top educational institutions on-board as founding participants. I think we will soon see Apple do for consumers of education what they did for consumers of music. Yes, I know this is wild speculation, but it's common sense that Apple is working on something big that will once again change the way the world works and I believe the previously announced Apple University may be just the thing. The technology is available – it's just a question of finding the right platform and developing the logistical framework for it to take flight. The app store and iTunes provide 2/3's of the necessary infrastructure. Getting the right e-reader and the education and publishing industry on board is the last chore. Joel Polodny from Yale is just the man to make it happen. I believe that where Apple is headed... and soon. You read it here first.

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