Wall Street Has Been 'Dead Wrong' on Apple

 | Sep 13, 2013 | 2:00 PM EDT  | Comments
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At the end of 2012, we mentioned the following facts in an Apple article:

"Apple Inc. (NASDAQ:AAPL) is one of the most popular stocks among Wall Street analysts. According to Thomson/First Call, 48 of the 58 analysts covering the stock have a buy or strong buy rating on the stock. Apple's one-year median price target of $750 is also 47% higher than its current price. Analysts also expect that Apple will make $49 in its current fiscal year ending September 2013 and $57 in FY2014. Even the most bearish analyst thinks AAPL will earn $41.75 in FY2013. So, according to Wall Street, Apple's forward price-earnings ratio is at most 12.

"Apple also currently has $128 per share in cash and investments on its balance sheet. After backing this out, Apple trades at a forward PE ratio of 9.5 according to the most bearish analyst. Apple's forward PE ratio (excluding cash) falls to 8 if we use analysts' consensus estimate. That's a really cheap valuation for a stock that is expected to grow its earnings by 21% over the next five years. That's not a typo. Wall Street analysts expect Apple to grow its earnings per share to $125 in five years. That's an estimated annual growth rate of 20.7% for a $500 billion company.

"Don't be fooled by these wild estimates. Just three months ago the same analysts expected earnings of $53.30 per share for FY2013, almost 10% higher than their current estimates. Their EPS estimate for FY2014 was also $61 just three months ago."

Apple (AAPL) may be the most widely-covered stock in the universe but it is crystal clear that Wall Street has been dead wrong about it. This quarter isn't over yet, but wildly-optimistic Wall Street analysts now expect Apple to earn $39 in FY2013. Just eight-and-a-half months ago, analysts thought this number would be $49. A year ago, they thought Apple would be earning $53 in its FY2013.

Take a moment and think about these numbers: $53 expected and $39 actual. Today, these analysts expect Apple to earn $42.50 in FY2014. This prediction may not seem as absurd as the "$61 prediction" a year ago about the same fiscal year, but it is.

Apple earned $44 in its FY2012, so its earnings per share declined by more than 11% over the last 12-months. We haven't seen anything remotely innovative launched by Apple recently and we don't think Apple will be able to stop the bleeding anytime soon. This means only one thing. Wall Street analysts' earnings per share predictions will again be proven wrong. We think Apple is on track to earn $35 in FY2014 and things will probably get worse for Apple in FY2015 and onward.

We are convinced that Apple will follow the same path that Sony, Nokia, and Blackberry have taken over the past 30-years. Steve Jobs was the main reason for Apple's success and Apple has been losing its edge since his death. The market realized this last year, hedge funds are starting to see the writing on the wall now, but Wall Street analysts have yet to recognize this.

We think the most likely scenario for Apple shares over the next 12-months is a share price below $400. We wouldn't be surprised to see Apple below $300 within three years. either.

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