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15Sep/09Off

Jim Cramer raises Apple (AAPL) target price!

In today's episode of Jim Cramer's Mad Money, Cramer has raised the target price of Apple (AAPL) to $264. This article has a great recap of the todays episode. Cramer states that the FASB is proposing a change in a revenue recognition standard such that it will dramatically increase Apple's reported earnings. Thus, making the stock appear cheaper than it currently is, even though Apple's financial position has not changed.

This episode has been bothering me all day because of the fundamental error in Jim Cramer's arguments. He made two points to justify his recommendation 1) The accounting change will increase Apples P/E ration thus making it appear it's financial position has strengthened and 2) Investors are going to ignore the accounting change.

However, I doubt it. Though there are many ways that a stock's price can be calculated, it is fundamentally the present value of the future cash flows. One does not have to be a hedge fund manager to see that an accounting change does not increase the future value of cash flows. Secondly, as Cramer pointed out, Apple's Statement of Cash Flows has already recognized the cash flow from the sales of Apple's products and investors do not ignore this important financial statement.

I would think that this revenue has already been priced in Apple's stock.

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