Delusions of Growth

Stephen Coleman predicts that Apple stock will hit $200 per share by the end of the year:

The Apple Stores, the iPods, the MacTel computers, the iTunes Music Store, the OS X operating system, Apple TV and the iPhone all deliver the great user experience those of us in the Apple world covet and demand. We know that excellence is on the way. We buy without pause. That is why Apple Inc. is going to deliver outstanding results this year and why the stock will hit $200 per share.

Don't get me wrong: Apple Inc is an outstanding company. They make great products. But $200 per share? I just don't understand how these fund managers can so blatently ignore basic mathematics. Some facts:

• Right now, Apple is trading at 34x earnings.
• Apple's earnings are $2.76 per share.
• Apple's stock is currently around $93.5
• In order to be trading at around the same P/E ratio, Apple's earnings would need to jump to $5.88 per share.
• This would imply a growth rate of 113%.
• Apple has never recorded a growth rate this large.

Let's all face it, the iPod was a slam dunk - one that has very little probability of being repeated. Everyone was scared away from making mp3 players at the time due to the murky legality of digital music. Apple took a risk, made a great product, and capitalized. But what of their current generation of new products? Will they dominate the market similar to the iPod? I think even Steve Job's mom would have a hard time imagining that the stars will align for Apple once again. I mean sure, the iPhone is a cool product, but much like the computer market, the cell phone market is saturated with competitors that have competent, much less expensive products. The Apple TV seems like it has all sorts of potential, but it too is bombarded with competition (TiVo, Microsoft, Sony, etc) and doesn't figure to be a real growth driver for a while now.

Google is another stock that growth investors foam at the mouth over, and yet if it were valued similarly to Apple the stock would be worth $946.

And all of this isn't even mentioning macroeconomic trends, such as the fact that we're nearing the back end of the business cycle. Or the swaths of liquidity flowing into global equity that is destined to be corrected.

Apple has gone from $50 to $95 in less than a year. That's insane. Shorting Apple at this point is the kind of trade that value investors dream about. Here you have a situation where the market leaning heavily bullish toward a stock when the numbers just plain don't add up.