The Great Apple Stock Debate

Pop quiz: Rank these four companies, listed alphabetically, in order of their stock performance over the past five years. (Okay, it’s sort-of a trick question, because Google went public less than three years ago, but bear with me.)

* Apple
* Autodesk
* Google

The answers, and the reason for bringing all this up, are below the jump. [digg=]

It’s probably not a surprise to find Apple on top. But consider: The second best-performing stock of the group – Autodesk, hailed not long ago as a major tech turnaround – has gained only a bit more than half as much ground as Apple. And Autodesk is up 600%. Google is further back with a 400% gain; while Amazon, this year’s buzzboy, lags slightly behind.

Apple Chart

Here’s the other surprising thing. Look at the bottom indicator graph: It shows Apple’s price-to-earnings ratio below its stock price. Since early 2003, Apple’s P/E has on the whole declined even as the stock has surged, although it’s risen some this year. According to Yahoo Finance, Apple’s historical P/E is 38 and its forward P/E is 30.

The only other large-cap stock I could think of that gave Apple a run for its (or its shareholders’) money was uranium miner Cameco, which has risen more than 1100% in five years – half on fundamentals (nuclear plants are back in vogue) and half on speculation. CCJ’s price-to-earnings ratio is 68, making Apple a relative bargain.

All of this is good to keep in mind during the debate that has broken out, once again, over whether Apple will rise further or come crashing down once the iPhone starts selling. Bears argue that the iPod market is getting saturated, that iTunes is becoming marginal and that the iPhone will disappoint. Bulls point to intense demand for the iPhone, rising appetite for Leopard and Macs in general and a strong track record for innovation.

Analysts are siding with the bulls. Piper Jaffray boosted its Apple price target to $160 this month, and UBS followed a few days later with the same target. But last week brought bits of bad news: The developers conference was anticlimactic at best; and Apple’s iPhone’s partner, AT&T, could alienate potential customers with its controversial campaign to fight piracy.

Now comes New York magazine’s none-too-flattering cover piece on Steve Jobs. Paul Kedrosky notes that the author of the story, blaring the unoriginal headline “iGod”, has been wrongly bearish on Apple twice before. And don’t forget that magazine covers are often classic contrarian indicators – which should add fuel to the bullish case.

Apple must fall some day – there’s no debate there. The question is when. The stock is nowhere near as expensive as, say, Amazon. The company and its CEO may both be overhyped, but there remains so much promise in Apple’s near-term future – early iPhone sales, Leopard, increase mainstream comfort with Macs – it’s not likely to come for a few quarters.

That said, the stock seems overdue for a modest correction, given its rush from $90 to $120 in less than two months. Corrections can be a beneficial thing for stock rallies, laying the groundwork for further advances. If one is coming, the only thing standing between Apple and $160 may be its own potential missteps.