Up, Up, and Away!

Its nice to see articles like this that support your ideas that Apple still has plenty of room to grow. Apple currently offers the iPhone through China Unicom.

"Apple Inc. fully supports China Mobile's next generation TD-LTE technology and talks are ongoing over a possible iPhone tie up with the carrier, China Mobile's chairman was quoted as saying," China Daily reports."China Mobile, the world's largest carrier by subscribers, has been negotiating for years with Apple to develop an iPhone that runs on TD-SCDMA, the home-grown standard it is using for its 3G network," China Daily reports.

"'We hope that when they develop the next-generation models, since Apple can create CDMA, they can also consider developing TD-SCDMA,' China Mobile Chairman Wang Jianzhou was quoted as saying on Wednesday by the Sina Technology news portal. 'These two years we have been discussing the issue. Right now the situation is moving forward. Apple has made it clear they will support TD-LTE,' Wang said in Davos, Switzerland."

China Mobile had 584 million mobile phone subscribers in December last year while China Unicom had 167.4 million.

Apple's 2011 Earnings per share misunderstandings

This week Apple released some amazing results reporting earnings per share (EPS) of $6.43. As you probably know, this was well above even the most bullish estimates, yet Apple stock has dropped from 52-week highs to the $326 level - encroaching on its 50-day moving average of $322.92. I believe that there are multiple explanations for this drop, namely:

1. Apple had run up over the previous four months and traders decided it was time for some profit-taking.

2. The announcement of Steve Jobs medical hiatus.

3. There is a general misunderstanding of the momentum of Apple stock, the 2011 projected EPS, and subsequently, the severely discounted p/e ratio.

While there is not much that many of us can do about the first two points, understanding the third point should allow for savvy investors to enter into a very profitable long position before the fair market price is realized.

Apple had a stellar Quarterly report covering sales through 25 DEC 2010. Highlights of this report included eps of $6.43, up 75% year over year. In guiding forward for 1Q11, Apple projected $4.90 on $22b in revenue, up from $3.33 on $13.5b in revenue. While this shattered analyst estimates, this is below the 75% increase that Apple realized in 4Q10.

Based on another 75% increase in eps, Apple will most like report eps of $5.83 per share. While this estimate does include iPads (not sold in 1Q10), it does not include the Verizon launch or the introduction of the iPad in 30 additional countries this quarter as mentioned on the latest conference call.

Based on this 75% year-over-year growth, conservatively we can conclude that, at a minimum, Apple will report the following:

4Q10 - $6.43
1Q11 - $5.83
2Q11 - $6.14
3Q11 - $6.43

Total 2011 eps of $26.52.

Other effects on earnings not factored into this estimate include:

1. International sales accounted for 63% of Apple's bottom line. With sales in China leading the way (400% increase) these sales are sure to continue to expand.

2. IPad will real release in addition countries this year, (30 this quarter as announced on the conference call), opening up new opportunities for revenue. Even more revenue will be realized if carriers start to subsidize the iPads with 2 year contracts.

3. Verizon iPhone launch could provide up to 16 million iPhones sold at high margins.

4. Launch of the Mac App Store on January 6th.

5. iTunes cloud services (rumor).

6. OS X Lion this summer.

7. The inevitable release of the next iPad and iPhone iterations (iPad 2 and iPhone 5).

Based on this conservative estimate of $26.52 and the current share price of $326.72, Apple is trading at a 2011 price-to-earnings ratio of 12.32. If you were to discount the $59.7b in cash that Apple holds in reserves, Apple is only trading at a 10.64 p/e multiple.

Therefore, based on an S&P average p/e multiple of 15 and not applying any premium due to earnings growth and potential, Apple should be trading at current rate of $452.83 (Remember that this doesn't include the factors listed above such as refreshes, additional carriers, or additional product launches).

In conclusion, if you are looking for a growth stock at value stock ratios, look no further than Apple!