Apple Still Has Room to Grow

I know the feeling well. You have a stock on your watch list, and you're just waiting for the perfect entry point. But before you can blink, the price shoots up, and your jaw hits the floor.

Don't give up on a stock just because you feel like you've missed the boat. Even Apple (Nasdaq: AAPL  ) , whose stock price has already climbed 50% year to date, can still offer opportunity for investors.

Still reasonably priced
Over the past six years, Apple's stock has increased 11-fold! When a company goes on a tear like that, analysts are bound to become cautious about the possibility for market saturation. As it is, Apple is the second-largest company (using market cap) in the United States, behind only ExxonMobil. Math simply dictates that its 11-bagger days are behind it.

Adding fuel to the fire is Apple's recent record of crushing analyst estimates. Over the last eight quarterly reports, Apple has beaten analysts' EPS estimates by an average of 28%. As time goes on, either the analysts will get closer to reality, or Apple will have an earnings miss. The law of averages simply dictates that it's only a matter of time before Apple stumbles.

All of these forces have combined to take a company with a five-year EPS growth rate north of 50%, and keep its P/E at the relatively reasonable ratio of 21.

Room for growth
I think the aforementioned concerns are understandable -- but a mistake nonetheless. Exxon and Apple are vastly different companies in terms of what they offer consumers and how much room they have to grow. There's no reliable company to measure Apple against in terms of its ability to innovate and "think differently." Size may limit Apple from being a 10-bagger, but who's to say that it can't double or triple in the next five to 10 years?

With that in mind, here are my top five reasons to believe in Apple's continued growth:

  1. The iPad: Apple's tablet can replace a laptop in many respects, but do so in a much more user-friendly size. Supply didn't even meet demand until mid-August, and the company still sold 4.2 million units during the past quarter.
  1. The iPhone on Verizon: Though many users have chosen Google's (Nasdaq: GOOG  ) Android phone because of Verizon's (NYSE: VZ  ) perceived superior coverage to iPhone-hoarding AT&T (NYSE: T  ) , Apple will be making its product available to Verizon users in the near future. Further defections to Sprint (NYSE: S  ) or T-Mobile may not be far behind, adding more fuel to the growth fires.
  1. Apple's international market: In the third quarter of 2010, Apple had only a 16.7% share of the smartphone market, leaving room for growth in a sector that grew 96% last quarter. International growth in iPhone sales has outpaced U.S. sales, despite fears that poorer emerging countries wouldn't adopt the phone in meaningful volumes. Furthermore, according to Gartner, the number of worldwide tablet sales (the iPad among them) is expected to increase 690% by 2014.
  1. Apple's pile of cash: The company currently enjoys a $51 billion war chest and zero debt. It can make plenty of strategic purchases without incurring any debt. Rumors have flown about potential acquisitions.
  1. The x-factor: Ever since Steve Jobs returned to Apple, the company's been thinking years ahead of its competition. Apple didn't enter the next-generation smartphone or tablet market; it created it. I have no idea what the next market-creating gadget will be, but if history's any indication, I believe Apple will lead the way.

Don't sit on the sidelines
I waited and waited for shares of similarly hot Netflix to drop into the $40s -- only to watch them zoom into the $60s instead. After I swallowed my pride and reevaluated Netflix, I decided it was worth buying into, even at that higher price. If I continued to sit on my hands, I would have missed out on a return of more than 150% in just a few short months. Don't let that happen to you with Apple.

Google is a Motley Fool Inside Value recommendation and a Motley Fool Rule Breakers selection. Apple and Netflix are Motley Fool Stock Advisor picks. The Fool owns shares of Apple, ExxonMobil, and Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Stoffel owns shares of Google, Apple, and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | 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 November 11, 2010, at 9:12 PM, xmmj wrote:

    "Ever since Steve Jobs returned to Apple, the company's been thinking years ahead of its competition. Apple didn't enter the next-generation smartphone or tablet market; it created it." [them]

    So nice to hear validation from a non-fanboy type! :)

    You missed a few more revenue sources.

    - iAd. If Apple is expanding coverage for this, then it must be successful.

    - Ever expanding Mac sales. Mac sales increase for a couple of reasons. First there is the halo effect. Now there are 3 sources of the halo effect, all 3 iDevices. The second is that they are probably the best made computers you can buy, with notably long life spans. One can argue about the OS - that is personal taste - but the research shows they have the highest satisfaction ratings of all computers. The fact is, the Apple stores STILL say that 50% of Mac purchases are the customer's first Mac. THAT is growth.

    You mentioned the new presence in China. That goes for Mac as well as all the iPs. What would happen if Apple took just 6% of China PC sales?

    I think Apple will double in a lot less then 10 years, probably in 2-3.

  • Report this Comment On November 11, 2010, at 9:20 PM, xmmj wrote:

    On another issue - the analysts.

    There is not a law of averages going on here. ("As time goes on, either the analysts will get closer to reality, or Apple will have an earnings miss. The law of averages simply dictates that it's only a matter of time before Apple stumbles.")

    I think the issue is simple. Apple's growth is so fantastic that no analyst has the xxxxx (oops) courage, to give a prediction that approaches reality. Even at the end of the quarter, with all kinds of data in hand, they still can't get it right - and that is practically in hindsight.

    Look at the iPod sales curve since inception. The iPhone and now the iPad will follow similar trajectories, and the Mac has its own.

    Apple will eventually hit the growth boundary, but not for some time yet.

  • Report this Comment On November 12, 2010, at 10:30 AM, brewersfan81 wrote:

    @xmmj-

    I'm in total agreement about Macs. I had to limit the number of forces working in AAPL's favor for the article, so it got cut out-but it's definitely a factor to remember.

    Brian Stoffel

  • Report this Comment On November 12, 2010, at 7:27 PM, imyoung wrote:

    Brian,

    Gartner reported Apple's 16.7% smartphone market for the THIRD quarter of 2010, not the second quarter of 2010 http://www.gartner.com/it/page.jsp?id=1466313.

    imyoung

  • Report this Comment On November 12, 2010, at 11:05 PM, brewersfan81 wrote:

    @imyoung,

    When I turned the story in, I actually had the second quarter numbers put in. The editors must've updated the numbers, but not the quarter. Either way, thanks for the clarification.

  • Report this Comment On November 12, 2010, at 11:51 PM, brianshall wrote:

    I agree that Apple still has room to grow.

    My take here, posted after today's close (12 November)

    http://brianshall.com/content/buying-apple-aapl-0

    When I look at the business fundamentals of Apple, I see a company run as well -- not marketed, but managed -- as well as any company in any industry. It's no surprise they are valued at almost $300 billion US. But when I step back and take in the long-term potential for Apple, I see a company whose future is undervalued.

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