Aug 052015

So here’s my take. I think this morning was the bottom. We may need a retest, and there’s always the possibility we make a slightly lower low, but in this case I don’t think so.

Most of my analysis is based on my continuous valuation charts, CPE and CFCF. There are no weak fundamentals to support intermediate term weakness in AAPL. So I see this decline as short term and technical in nature. AAPL may indeed trade at a lower valuation range now due to this decline, but the ramifications of that are still bullish from here. That’s because my valuation charts show the CPE and CFCF lines sloping upward rather aggressively. Why? Well because Apple’s growth is impressive, of course. The best growth in 3 years. Furthermore, that growth is still increasing. Solid earnings. First derivative, growth, is positive. Second derivative, change in growth, is positive as well. No one can possibly claim the fundamentals are weak with those stats.

So with steeply sloping valuation lines, it means AAPL price needs to aggressively rise from here to maintain a typical valuation trading range. Let’s look at what that means from CPE and CFCF perspective.

From a CPE perspective, today’s low is just below CPE 13. We should be able to make it back up to CPE 15-16. Looking at my chart that means a price of 140-150 should be reached within a few months. My chart (not updated with this week’s action yet):

AAPL Continuous P/E

From a Free Cash Flow (CFCF) perspective, the picture is even better. Today’s low is near FCF multiple of 9. That’s down near the valuation lows of early 2013 when Apple earnings and FCF had negative growth. FCF growth is now better than any time since then. Again, steep valuation lines. If we conservatively expect AAPL to go back to a CFCF multiple of 12 (the middle of the recent range before this week), then a price of 160-170 should be expected before year end. Here’s my FCF chart:

AAPL Continuous Free Cash Flow

So that’s what I’ve got. From a FCF perspective especially, AAPL valuation is crazy crazy low down here. FCF multiple of 9, even before subtracting out cash? That’s just crazy.

Update later that day:  The only way I see AAPL staying at these lower levels, i.e. not put in a bottoming formation near here, is if the whole market is in the process of falling apart. A market meltdown would keep AAPL price under pressure. Absent that, AAPL is just too compelling a valuation to stay at this level for long. It’s like trying to hold a balloon still, partially under water, while the water is rising. AAPL is now near FCF multiple of 9. At the end of the quarter this price level will be an 8 multiple. At the end of the year 7. Subtract out cash and the FCF multiple at the end of the year would be less than 5, maybe even close to 4! It’s an amazing and crazy valuation situation AAPL is in for the latter half of this year.