Mad Money

Cramer: Is Apple Too Expensive?

Should investors own stock in Apple ? That is the question to be asked as investors and Apple lovers await tomorrow’s breakthrough tablet invention.

Yesterday, Apple reported a quarter that was better than expected, in part because of a change in the way that AAPL can recognize revenue. This is something that Cramer flagged for investors last fall, which gives the company larger earnings-per-share number in the future. Apple saw a 50% profit growth, the most Cramer has seen this entire quarter, that came from everything: Macintosh sales, which are accelerating and still only have 5% of the market, I-pods, more than 20 million sold and the I-phone, the ultimate mobile Internet tsunami play that is just getting started in its worldwide penetration.

An AAPL A Day?

But here’s the rub. Apple’s new tablet is the most hyped new device that Cramer's heard about since the I-phone. And the last 25-points this stock has run have been directly attributed to that hype.

“Now, I believe that Apple can revolutionize how we watch and listen to anything entertainment. That’s what the Mac is about; that’s what the I-pod is about. It is what I-tunes is about where you pay to get this stuff; it’s even what the I-phone is about,” Cramer said. "These are devices to deliver intellectual property of every single kind." 

Now, here’s the issue. Every time Apple unveils a new product, traders unleash “slings and arrows” and scalp profits or put out shorts in order to profit from what they think is a stock that’s overheated by homegamers. Usually it takes two days for the sellers to exhaust themselves. Still, their shorting and dumping confuse the buyers and the owners ,and then the questions begin. Cramer thinks this time will be identical and a meaningless “shake out” will take place after the tablet is revealed.

Investors who own AAPL stock should hang on. But more important, because of this obvious and well-known pattern of a sell-off after a new product introduction, investors should get the chance by Friday to get into the stock. Cramer is using a $300 price target for the stock. To reach this target price, Cramer first looked at the analysts’ predictions. Right now the prediction is that Apple can earn $12 a share this year. Is it expensive? Remember Cramer’s equation: divide the price of the stock by the earnings estimates to get the multiple of those earnings. This roughly gives a 17 multiple. Cramer said that’s what's paid for a cereal company like General Mills . But, GIS is growing literally half as fast as Apple.

“I think Apple’s the fastest growing major company I follow. It is worth paying much more for those earnings in a company with eighteen percent growth,” Cramer said. Plus, the $12 earnings estimates do not include anything for the tablet.

Next, Cramer canvassed the majority of stocks with a similar growth rate to Apple’s. The majority trade is roughly 25 times earnings. So, multiply the $12 earnings estimate by 25 and there is Cramer’s price target of $300.

Cramer thinks the Tablet sales will prove to be big and the estimates will prove to be too small.

Bottom line: Cramer thinks investors should start buying Apple.

Cramer's charitable trust owns Apple.

Call Cramer: 1-800-743-CNBC

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