How Apple Became 'Accidentally Expensive'

What if Cramer told you that Apple, trading at $274 a share, was in fact cheap?

Here’s how he came to that conclusion: As little as three months ago, analysts thought Apple could earn $13 a share in 2010. If price equals earnings times multiple — (P = E x M) — then that means AAPL traded at about 20 times a share, though its expected long-term growth rate was only 16%. (Remember, Cramer considers a stock expensive if it trades for more than one times its growth rate.) But now in anticipation of the iPhone 4’s release, Deutsche Bank has upped that forecast to $18 a share for this year, which puts the multiple at 15. Plus, it turns out Apple is now growing at a 19% clip.

“So instead of an accidentally expensive stock,” Cramer said, “you’ve got an accidentally cheap one.”

How did all this happen? Mainly because analysts continue to underestimate the demand for Apple’s products. Piper Jaffrey thought Apple would sell only 900,000 iPads by the end of June, while SC Bernstein predicted 2 million by the end of September. Well, guess what? The number was actually 3 million in the first 80 days. That’s how you get an accidentally expensive stock. Analysts misjudge Apple’s potential, giving the company less than worthy earnings estimates, and that makes AAPL seem pricier than it is.

Get this, though: Cramer thinks Deutsche Bank is wrong. He’s betting Apple earns $19 a share this year, which brings that multiple down to 14. And he’s not backing out the $65 a share of cash that he thinks is in the stock. Again, remember that cash doesn’t earn a multiple, so Apple may be even cheaper than anyone has thought.

When this story published, Cramer's charitable trust owned Apple.

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