Apple's New Reach

Case Background: Apple (AAPL) has stormed the market with a new name (Apple, Inc.) and a phenomenal new device: the iPhone. According to Apple, Inc. CEO Steve Jobs, the iPhone is nothing short of revolutionary. The level of improvement over current smart phone technology is portrayed as something like that of the horseless carriage over…well, the horse. New features include touch-screen controls; the ability to play music; Internet access; and a Mac OS. It’s all part of Apple’s bid to transition from a computer manufacturer to a major player in the consumer electronics industry. Discussion: The market likes it. Upon Jobs' announcement, Apple shares jumped 8 percent. It was a great day to be an Apple shareholder, as about $6 billion of wealth was created. Shares of Apple stock climbed $7.10, with a close of $92.57 on NASDAQ.

Tuesday, while 120 million Apple shares were being traded, other smart phone makers’ shares declined: Treo (from Palm) dropped 5.7 percent; Research In Motion, Ltd. (makers of the BlackBerry) lost 7.9 percent, and Motorola Inc. was down 1.8 percent.

Could there possibly be a downside? Not necessarily, but one may want to consider that the iPhone won’t be for everyone. Its nice array of features come at a fairly hefty price: $499 for a 4GB model or $599 if you want 8GB. As a result, there is still a solid market for other cell phones, PDAs, and music players. After all, not everyone will be willing to pay for every feature the iPhone offers.

Conclusion:
The iPhone shows great promise, as evidenced by the market’s reaction to its announced introduction. And it may still not be too late to ride this wave. Apple has traded from $50.16 to $93.16 over the past 52 weeks. Its current P/E ratio stands at 40.83.

However, the wise investor may not wish to abandon the companies marketing less expensive phones with fewer—but more user-tailored—features. If Apple stock is out of your range, consider a strategy of investing in up-and-coming, low-end, or niche-features competitors.

Disclaimer:
P/E ratios are a quick way to sort out the leaders within the same sector. Never use a P/E ratio exclusively to make an investment. Remember, a P/E ratio is measured using historical trailing earnings for the previous 12 months and does not necessarily indicate strong future earnings. P/E ratios, when used with other market value ratios, can help investors to make consistent returns and to minimize losses. Various interpretations of a particular P/E ratio are possible:

1. 0-13 - Either the stock is undervalued or the company's earnings are thought to be in decline.
2. 14-20 - For many companies, a P/E ratio in this range may be considered fair value.
   
   • The average U.S. equity P/E ratio is usually around 14, which means it takes about 14 years for a company's stock to earn back its full purchase price.
   • Average P/E over the entire market is a good indicator of overall market strength.
3. 21-28 - Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published.
4. 28+ - A company whose shares have a very high P/E ratio either really does have an exceptionally rosy future or the stock may be the subject of a speculative bubble.
5. A company with no earnings has an undefined P/E ratio.
   

Financial information was provided by http://finance.yahoo.com (01/09/2007) This investment article was edited by http://www.proof-reading.com; copyright © 2006 PE-Ratio.com. All rights reserved.