By Philip Elmer-DeWitt
May 3, 2012

FORTUNE — Watching Apple’s (AAPL) share price see-saw over the past three weeks — up to $644, down to $555, up to $618, down to $581 — investors might well wonder whether there’s any limit to how high or, more to the point these days, how low the stock can go.

To set some guidelines, we asked Bullish Cross‘ Andy Zaky to freshen a pair of charts he posted last November for an article entitled Apple: The Most Undervalued Large-Cap Stock in America.

The bar graphs at right, updated to reflect the most recent quarterly report, contrast the exponential increase in Apple’s earnings with the steady decline in the value of its stock as measured by its price-to-earnings ratio (P/E).

The top chart shows Apple’s twelve month trailing (TTM) earnings roughly doubling year-over-year (from $20.98 in April 2011, for example, to $41.04 in April 2012).

The bottom chart shows its stock’s value (its P/E, not to be confused with its stock price) falling from as high as 50.98 in Q4 2007 to as low as 12.62 in Q2 2012.

This is called “compression,” and you hear Apple investors complaining about it all the time. They like to contrast Apple’s P/E ratio to Amazon’s (AMZN).

Apple’s revenues grew nearly twice as fast as Amazon’s last year. But Apple’s stock is trading this week at less than 14.3 times earnings. If it were trading, as Amazon does, at 190 times earnings, it would be selling for more than $7,800 a share.

But comparing any stock with Amazon buys you nothing but heartache.

Zaky’s point is that there seems to be a limit to how much Apple’s P/E can be compressed. “In its recent history, it went to 12.6 only twice,” he says. “During the financial crisis and now. And each time it led to a massive reevaluation.”

He cites three factors that keep Apple’s P/E from going much lower:

  • The quant funds. Whenever Apple’s P/E falls below the S&P 500’s — currently 16.42 — the funds’ computers kick in and Apple gets a jump start.
  • Apple’s cash. Apple’s $110 billion in cash and marketable securities works out to $118 a share. At their current rate of growth, Zaky estimates, those holdings will reach $460 a share by 2016.
  • Reasonableness. Even the most bearish fund managers can’t ignore Apple’s quarterly reports, as last week’s post-earnings rebound demonstrated. (See The Apple slingshot released: $57 billion in one clock tick.)

Zaky expects that by October, when Apple issues its final report for fiscal 2012, its quarterly earnings will have reached $50.49 a share. Even at 12.5 times earnings, that’s $630 a share. At 15 times earnings, it’s over $757. And that’s without a new iPhone.

Bullish Cross has been oversubscribed for some time by members who pay to read Zaky’s live blog and weekly market guidance. But he offers this advice for free:

“The two key levels of support for Apple’s stock in the intermediate term are $537 (32.8% retracement) and $503 (50% retracement) a share.  We believe Apple presents with a unique buying opportunity at $537 and an extraordinarily rare opportunity at $503 a share.  While we don’t believe the stock will ever see $503 a share, if Apple does reach that level, it would be the equivalent of $310.50 in June 2011 or $80.00 a share in March 2009.

Investors tend to overcomplicate things.  Apple will undoubtedly see $750 a share by January 2013 and will likely see $1,000 no later than the fall of 2013.

Thus, we believe the best thing to do is just to go in and buy now, ride any  potential drawdown to $537 a share, ignore all of the nonsense you are likely to hear on the way down and beat Wall Street by being smart enough to realize what they often do not.  And that is the fact that Apple will inevitably sell 100 million iPhones a quarter within the next few years.  When that happens, Apple will be trading far north of $1,000 a share.  Who cares about a $30 – $50 drawdown when there is over $500 in upside for the stock over the next year or so.  Don’t make things so complicated.  Just go in and buy.”

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