Apple CEO Tim Cook speaks during an Apple special event at the Yerba Buena Center for the Arts on... [+]
Has Apple grown rotten?
To be sure, Apple's chart traces a nasty pattern. Shares began falling soon after the iPhone 5 announcement on Sept. 12. Since then, investors have peeled off profits from Apple's sky-high share price. That left the stock to tumble about 10% since mid-September.
Still, it's tough to dismiss Apple as finished. It looks cheap and commands a growth position amid technology peers. Moreover, Apple's slide wasn't a solo affair. Technology stocks as a whole received a beating. Microsoft shares fell 5%. Oracle too declined 5%.
FORBES turned to David Rolfe, manager of the large cap RiverPark/Wedgewood Fund, to cut to Apple's core. Rolfe first bought Apple back in late 2005—a decision that netted him a tenfold increase in the stock. He's certainly confident in keeping Apple as the fund's largest position. "I've had some clients call up and say, Hey what's going on?" he says. "It's just a 10% correction from what was admittedly a pretty crowded trade. I'm not trying to over-think it, though." He adds, "At $630 a share, the risk-reward ratio is pretty favorable."
Edited excerpts of the conversation:
FORBES: What's led to the slide in Apple stock?
Rolfe: I would readily agree with the sentiment that it was a crowded trade. Certainly when the stock ran up to $700. It’s looks less crowded now.
The stock usually trades in a consistent pattern. You get a significant run-up in anticipation to a new product announcement, then you get a little bit of a pullback. In this case, you got a huge run-up in the stock. Then we get Mapplegate. Some real concerns there. And bam! It's down 10% in a heartbeat. The short-term bears had this right. My disagreement is with the long-term bears.
F: Valuation seems to make Apple a buy here.
R: When you consider how cheap it is, the stock is a buy. We estimate next year's profit at $65 a share, which is more than the consensus estimate of $53. We're admittedly bullish. Using our estimates, the stock fetches 9.8 times earnings. That's a discount to the market. [The S&P 500 trades at 12.6 times next year's estimated earnings.] You're left with a company that's fast outgrowing the market and selling at a discount. That's a buy.
Looking ahead, a bull would put that stock near $1,000 by the end of 2013. A bear, closer to $750. Conservatively, I see it reaching $850 without too much trouble.
F: What's propelling Apple?
R: Apple will ship between 150 million to 160 million iPhones this year. That's in addition to 75 million iPads. This will mean at least $200 billion in revenue, a truly staggering figure. They hit $100 billion in revenue a few years ago, and it was perceived as a huge achievement. Now, two short years later, we're talking double the revenue at $200 billion. Also, I think they're only scratched the surface when we talk about customer base.
Plus, they're continuing to take market share from companies like Hewlett-Packard and Dell for software.
F: Sometimes it seems like the large numbers involved with Apple may scare off investors.
R: The numbers certainly are huge. When you look at the recent correction, think of it as more as: Would you panic as much if a $70 stock went down to $63? Same proportions, but it doesn't seem as bad because we're not talking $700 to $630.
F: What's the bear case going forward?
R: The wildcard is supply. Can they keep up with supplying 200 million iPhones? That's probably our biggest worry in our estimates. It's not a demand-side problem. It's a supply-side.
But here's what I'd say to a critic, who argues that the company is too big to keep growing at this pace. Yet it keeps delivering, beating estimates nearly every time. Certainly those bears that took profits just reaped a 10% pullback. Congrats to them. Great trade. It's time to think long term, though.
F: Thanks, David.
Reach Abram Brown at abrown@forbes.com.
