Is Apple's stock worth the price?

At Apple's current growth rate, about 40%, my answer is yes. If you project that out 5 years, the stock will be about 6 times higher than today's price. If you halve the current growth rate, to be conservative, you'll still almost double your money in 5 years, even assuming conservative PE ratios.

If Apple can maintain their current earnings per share(EPS) growth rate, the projected stock price in 5 years would increase about 650% or 50% compounded. That's a big if, but let's take a look at some graphs demonstrating this potential.

Click here http://www.hotvaluestocks.com/?q=node/10 for the full size of this graph. You can see their current EPS growth as the purple line (the blue line is sales growth). The growth rate as listed at the bottom of the screen shows the estimated growth rate as being around 40%. This is what I've plugged into my NAIC Classic software (more on this software latter) so that we can see what this means to the stock price over 5 years at the current rate. I've assumed that the pace since 2004 can continue (at 40%).

So with this assumption that Apple can continue this pace here's the analysis (also done with NAIC classic software). Again the full size image is available here: http://www.hotvaluestocks.com/?q=node/11

Now if I assume that the growth rate is 20% trying to factor in a slowing of growth, I get a compounded rate of return of about 12% This 12% calculation is assuming a PEG (future PE to future earnings growth ratio) of 1.5 for the average high PE and a PEG of 1 for the average low PE In the optimistic scenario I've used the historical high PE of 53.1 and the historical average low PE of 26.4, this giving a potential rate of return of 50% compounded. These potential outcomes are with pretty good upside downside ratios. If this is mumbo jumbo to you I end this post with directions on how to educate yourself in this kind of analysis. It becomes very easy with the NAIC Classic software.

Note on NAIC Classic software. In one of Peter Lynch's books (Beating the Street pages 32-35) he recommended the NAIC club, which is now known as BetterInvesting. I joined the club right after reading this. BetterInvesting's aim is to better educate people about stocks and mutual funds. Their website is www.betterinvesting.org They sell this software that I used, and I think it is just awesome. You plug in your own projection on EPS growth (and projected PE levels) and it calculates scenarios. It downloads data from S&P data, a service that comes with your membership fee. I make no money recommending this club, I too am a member and belong to a local chapter which manages a small portfolio together. BetterInvesting has allowed me to publish results of my stock selection guides (featured in the pictures and attachments). For greater understanding of these exhibits consult the BetterInvesting website. Also if you post a comment on this blog I will try to answer any questions.

So what will happen to Apple's EPS growth rate? Your guess is as good as mine. I do own some Apple stock and my hope is that iTunes will continue to merge with the living room and become the ultimate on-demand for viewing music and media on TV sets. That would propel Apple's growth rate for instance. I'm an IT professional in fact and I think that Leopard and OSX are great and Apple will continue to capture market share, even in the business world -- this would propel EPS growth. The iPhone is just a great gadget, that alone could propel EPS growth, and I'm hoping Apple will capture market share amongst business users there as well.

So what will happen to Apple's growth rate and will the stock's compounded rate of return be 15-50%, your guess is as good as mine (well I'm hoping my educated guess is pretty good), but this investor thinks there's sufficient margin of safety to invest in Apple's future.

This is not financial advice. I have no Delphic future-sight and recommend you do your own research prior to buying any stocks. I'm an IT professional and hold a Masters degree in finance from Brandeis University.