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Apple's Insane Rebound Rally

By Evan Niu, CFA - Nov 19, 2012 at 6:01PM

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Rock and roll.

With the bears in firm control of Apple (AAPL -2.46%) in recent months, a rebound rally has been long overdue. Shares were up nearly $39 today, enjoying healthy gains of over 7% on a broadly up day. That represents a gain of approximately $37 billion in market cap for the iPhone maker, allowing it to retake the $500 billion valuation threshold it gave up last week.

Back in black
The only official news out of Cupertino today was that AC/DC is now bringing its entire catalog to iTunes. As much as some investors may love Back in Black, somehow I don't think this is what's causing the $37 billion move.

In recent days, investors ignored bullish sentiments from Street analysts, but it appears that today they're heeding them. Topeka Capital Markets analyst Brian White, a rather vocal Apple bull that was already out touting the Mac maker's prospects recently, is on record again calling for an end to the sell-off.

At the risk of sounding insane, White goes as far as to call it "insanely insane." According to his calculations, Apple now trades at just 9.8 times next year's earnings, or 7.6 times when excluding cash. That's cheaper than the 12.5 multiple that the overall S&P 500 is trading at. Apple has put up 92% growth each year on average from 2003 to 2011, compared to the S&P's 7%. That's 13 times the growth over the past eight years, but shares trade at a 20% discount based on its earnings multiple.

I've made that same argument before, pointing out how Apple is cheaper than the S&P yet disproportionately responsible for its earnings growth. I wrote, "That means that one of the biggest drivers of earnings growth in the market is currently cheaper than the market itself." That was six months ago, yet still holds true today -- even more so since shares hit six-month lows on Friday while trailing earnings are higher.

Certainly no one expects Apple to continue nearly triple-digit growth considering its sheer size now, but White thinks 20% to 30% growth over the next five years is within reach considering the company's relatively low market share in smartphones and PCs. On top of that, the tablet market is still nascent and potential opportunities like the Apple TV haven't even been factored in.

White says to get in now while the getting's good, since we're in the midst of Apple's strongest quarter seasonally.

A second opinion
Merrill Lynch analyst Scott Craig is also adding some context to the two-month-long sell-off. One potential culprit is year-end selling as investors look to lock in profits on Apple ahead of possible increases in capital gains taxes next year. With Apple's incredible year-to-date performance before the sell-off began, it's entirely reasonable to think that some shareholders are looking to pocket some gains.

Beyond that, there have been some justified fears that the iPhone 5 may not perform as well, but these challenges stem from the supply side of the equation while the demand side remains healthy. Gross margins are also under pressure, which is a function of the sheer number of products that have received makeovers over the past couple months.

Competition has also continued to escalate. Google (GOOGL -1.35%) Android now dominates three-quarters of the smartphone market, five times the share that Apple's iOS garners. What those market share figures don't say is that Samsung is one of the few Android OEMs actually making money on the platform.

Apple's tablet share has now dipped to 50% in the face of escalating competition from Amazon.com's (AMZN 0.19%) Kindle Fire and Google's Nexus 7, while many prospective iPad buyers sat on the sidelines awaiting the announcement of the iPad Mini. With the recent launch of the iPad Mini, chances are that Apple will reclaim some of its lost share in the fourth quarter and that Amazon and Google will give some back, despite their own respective product launches. The e-tail and search giants are both entering the full-sized tablet market in the quarter.

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