Jonathan, great post as usual, but I wanted to augment your analysis somewhat.
I agree that owning Apple stock now would come with risk. To your point, how much longer can they disrupt, will Steve Jobs come back to Apple, when will iPhone 5 be released and will it have the same adoption rate as the iPhone 3 and 4.

In addition, Apple, like most tech companies, does not pay a dividend to their shareholders, so there is no upside from a dividend potential. With all those factors being said, I would not count out Apple quite yet.

With the Mac desktop and laptops, Apple sold 3.76 million Macs during the quarter ending March 2011. That represented a 28 percent unit increase over the year-ago quarter; not bad during a recession. The Company sold 18.65 million iPhones in the same quarter, representing 113 percent unit growth over the year-ago quarter; not bad for a phone that has a flawed antenna, as some contend.

To your point, the over saturated personal media player market, Apple reported a 17 percent decline, even though they still sold 9.02 million iPods during the quarter.

For the long term investor, I think Apple makes sense to have somewhere in their portfolio. Most people already do in the form or a Mutual Fund in their 401(k), so the majority of American’s in a 401(k) plan do own it.

I think with the introduction of the new desktop OS later this year, which will unify the OS platform across all of Apple’s OS enabled devices, this will bring about a new era of competition and innovation amongst the competitors in this space. More and more the consumer is demanding a device that works, is simple to use, and provides a seamless experience. Apple has that locked up in my opinion, with some of the best and brightest engineering and marketing minds in the business. As for the stock, the shareholders that have subscribed to the Warren Buffett approach to investing, buy and hold, and bought at sub $50 a share in 2005 are very pleased with the risk they took, now that the stock closed yesterday at $353.01, my math is terrible, but that is %700 increase. Not too bad in my book.

I see two great points in your comment and one I disagree with. To the agrees. First, the recovery of the Mac product line (it’s never going to be as dominant as it was pre-windows but it can certainly continue to grow some) is a great sign for investors. This ability to grow without disrupting is a mitigating factor to the risk I mentioned. Second, you bring up the very real probability that Apple can/will continue to grow for the foreseeable future. In fact, they have enough cash in the bank that they could potentially survive one or two failed product launches and still someday (for the long term stockholder) recover and eventually surpass their current position. Just ask anyone who’s held Apple stock since the 1990s about that.

The part of the comment I disagree with is separating buying $APPL and current investors holding it. There is no difference, holding a stock is just like buying it every morning (forgetting fees/taxes for the moment). At the end of the day $APPL’s gains are yours and you either choose to hold on to them or reinvest them (by not selling). So all the same risks apply to the people who bought up $APPL for $50 in 2005 as apply to someone looking at buying it today. Careful about “riding streaks”, it’s not good with the laws of probability.

As a long time Apple stockholder I have believed in their story and growth potential, which has paid off for me enormously. Looking at Apple’s current position, I do agree with Jon that eventually they are bound to run into some failures. Every company does. That is why I am considering selling part or all of my holdings. However, part of what has stopped me from selling in the last 6-12 months is their evolving market valuation.

Apple is not valued at the same PE ratio as they were two years ago. Therefore, to say that any of these risks are not being discounted into the stock would be naive to how they are trading today versus the past 5 years. A quick look at Yahoo Finance will tell you that Apple’s TTM (trailing twelve month) P/E is 16.68 and their FTM (forward twelve month) P/E is 12.37. I know that Yahoo Finance financial metrics are not updated as fast as Bloomberg or other paid financial service providers, but I know that Apple’s TTM or FTM P/E are not too far off. My Scottrade account shows that Apple’s TTM P/E is 16.71 and their FTM 13.53. Their current PEG ratio, a measure of a companies FTM P/E ratio relative to their 5 year forward growth rate, is .8395 (FTM P/E ratio divided by 5 year future growth rate). A PEG above 1 is considered to be an overvalued company and a PEG below 1 is said to be undervalued. However, many companies will trade close to 2 times PEG and some will trade at 0.5 PEG ratios. Some of this is a result of rapidly revising growth rates and stock dividends that can mess with this metric.

I agree with the whole post, except for the fact that you say Apple’s stock is trading at 20 PE, which is too high for Apple. Apple is not trading at a 20 PE. Yes, the growth of Apple is not what it was 2-3 years ago and they have plenty of risk going forward, such as a potentially eroding margins, Steve Jobs health and their ability to reinvent another technology product. However, a quick look at how the market is valuing Apple shows that these risks are being discounted to a certain extent in the stock.

The question I have to ask myself as an Apple stock holder is 1.) are these risk discounted appropriately and 2.) how will institutional investors react to changes in Apple’s future market potential as new information about the company becomes public.

You’re right, I’m not sure where I got the 20 P/E, maybe looked too quick and took their EPS (which is at 20). I think everything I said is still valid at a 16.68 P/E.

Forward P/E is based on projections, so I’m not sure it plays here, because I am calling in to question those projections. The fact that their valuation is moving is interesting, since I haven’t owned APPL I haven’t really followed it. I did a little research and their PE ratio has been fairly steadily falling since a peak in late 2009 of 20.5 or so. That does lead me to believe $APPL stock holders are aware of these risks.

I still think it’s priced as if the big wins will continue, but maybe not as aggressively as I thought.

Awesome analysis Brett. I agree, there will come a time when Apple will fall from it’s current meteoric rise, but to your point, a lot of the risk has been priced into the stock, so hopefully that fall will be a soft one.

The industry is trying to chip away at Apple’s credibility with the antenna gate, and now the privacy concerns that surfaced this week. With all that being said, there were hundreds of Chinese standing in line this morning in China for White iPhones. It seems Apple just keeps bouncing back from all of this negative press, and a quick glance at Apple’s balance sheet shows a strong demand for their products over seas. Time will tell on this one….

Apple’s still under valued, with their foray into The TV market and Education Markets they will continue to disrupt. The beauty of their products is their integration amongst themselves. No other company offers a seamless experience across so many unique devices… apples about to blow out earnings again and probably won’t move much because of manipulation, but this time next year, it will have surpassed $500 at some point  this year.