From The Trading Desk

By: Brian Goldberg

Stock Spotlight: Apple, Inc. Is it time to take a bite out of this Apple?

The stock market is off to a fast start in 2013, leaving the “Fiscal Cliff” noise in the dust as the S&P 500
has powered ahead with a 9.2% gain through 3/22. The market has not been so kind to the shares of
Apple, Inc. (Ticker: AAPL), the largest and most widely watched stock on the planet as its shares have
declined 13.2% over the same period. Apple had made an unprecedented move higher for the first 3
quarters of 2012, with shares rising 74% before making its intraday high of $705.07 on September 21 st,
which coincidently was the day of the iPhone 5 launch. At a recent quote of $461.91, the stock has
dropped 34.49% since the tremendous hype surrounding the iPhone5 and new iPad product launches.

So how could the best company on the planet lose 1/3 of its value, despite a super strong stock market?
Too those who thought the stock was heading to $1,000, Can the “market”, the ultimate judge and jury
be mispricing the stock by such a wide margin? Many defenders will point to financial metrics such as
the low P/E ratio of 9.12x 2013 earnings estimates, a low PE/Growth rate (PEG), or the mountain of cash
on the company’s balance sheet. That’s all great, but stocks often move based on the sentiment
surrounding the shares. When the stock was trading near $700, there was excitement surrounding the
company as “Wall Street” analysts were issuing extremely bullish reports with $1,000 price targets and
touting the upcoming product launches. Keep in mind, the Stock had already moved over 70% in 9
months and was the world’s largest company based on market capitalization.

Over the long-term, one of the biggest drivers of a stock’s performance is the company’s ability to grow
revenues and earnings. Apple’s financial performance over the past 4 years was simply amazing, which
saw it grow its sales and earnings at compounded annual growth rates of 42.9% and 69.4%, respectively.
By the fall of 2013, Apple had simply set the bar and expectations too high and became a victim of their
own past success. In the weeks that followed, the iPhone 5 launch, there was the Maps application
debacle, and a lackluster earnings report that had investors questioning the ability of the current
management team to successfully carry on the legacy of their Iconic founder and innovator Steve Jobs.

I believe there are three reasons why the stock has declined. The first simply being that the euphoria
around the shares had reached peak levels as most hedge funds and mutual fund managers had already
owned the stock and there were no more analysts left to upgrade it. The second being that Apple
already held such dominant market positions in its mains product lines that it will be hard to maintain
them as the competition over time is not going to get worse. Samsung has been making inroads with
their Galaxy Product lines biting into the Iphone’s market share and given that Apple practically invented
the Tablet market they really have nowhere to go but down. The overall pie of the smartphone and
tablet market will grow significantly but the key question will be can AAPL maintain its current position.

From 2007 through much of 2012 Apple was knocking the cover off the ball. This is no longer the case as
the table below displays; Apple is only projected to grow Sales and earnings by 16.2% and 0.1%,
respectively in the fiscal year ending 9/13 and by 13% and 12.6%, respectively in the year ending 9/14.
These numbers simply pale in comparison to the stellar numbers the company delivered from 2008-2012
and this is the third and main culprit behind Apple’s (the stock not the company’s) fall from grace.
Regardless of what business a company is in, the stock will not go up if its earnings growth goes from
59.5% growth one year to 0% growth the next.

Fiscal Year 2008 2009 2010 2011 2012 2013E 2014E

Sales ('000) $37,491 $42,603 $65,067 $108,598 $156,505 $181,840 $205,400
Y/Y Change 35.3% 13.6% 52.7% 66.9% 44.1% 16.2% 13.0%
EPS $5.36 $9.08 $15.15 $27.68 $44.15 $44.19 $49.75
Y/Y Change 72.5% 69.4% 66.9% 82.7% 59.5% 0.1% 12.6%

So is Apple a buy at current prices? The sentiment has clearly shifted, expectations have been ratcheted
down and many of the same analysts, who upgraded the shares at $660, downgraded them at $460.
Downside is probably limited as the company’s huge cash hoard, prospects for a dividend increase and
cheap valuation should provide it some cushion. For the stock to regain its momentum though they will
have to successfully defend their turf in existing production lines with new innovative features but more
importantly with the launch of brand new “must have” products that build around their already
impressive ecosystem. There has been talk of an iTV or iWatch but I have my doubts that either of those
would be a category killer type product necessary for them to regain MVP status among investors.
Perhaps, a move into digital payments could be supported with the technology from Authentic, which
Apple acquired last year.

Price Price
EPS P/E Price Target EPS P/E Target EPS P/E Target

$49 9 $441 $49 10 $490 $49 11 $539

$50 9 $450 $50 10 $500 $50 11 $550
$51 9 $459 $51 10 $510 $51 11 $561
$52 9 $468 $52 10 $520 $52 11 $572
$53 9 $477 $53 10 $530 $53 11 $583
$54 9 $486 $54 10 $540 $54 11 $594
$55 9 $495 $55 10 $550 $55 11 $605

The above table shows some potential price targets for the shares given expected earnings per share
estimate and the multiple the market would pay for each dollar of earnings. Would you take a bite of
this Apple?