Why is Apple so Cheap?
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Apple (NASDAQ: AAPL) are really cheap when compared to other tech companies or even to its own past history. The main reason for this undervaluation is more related to investor’s perceptions and behavioral biases than with the company's fundamentals or growth potential. The cold hard numbers show that Apple may be one of the most compelling investment opportunities for long term investors who follow a disciplined investment approach.
The table compares valuation and financial ratios for Apple versus other technology bellwethers like Amazon (NASDAQ: AMZN), Ebay (NASDAQ: EBAY), Google (NASDAQ: GOOG) or Facebook (NASDAQ: FB). The conclusions from the analysis are quite clear: Apple comes ahead of the rest of the group for a wide margin.
Apple is the cheapest alternative in terms of P/E, Forward P/E and Price to Free Cash Flow – P/FCF. Furthermore, it has the highest profitability as expressed by the Return on Equity, or ROE ratio. Apple doesn't have the highest expected growth rate, but its valuation adjusted for growth expectations – PEG ratio – is the lowest one in the group.
So, why is Apple so cheap? Is it because the company is riskier than its peers and hence deserves to trade at a discount? Hardly, Apple is the biggest company in the world, has a pristine balance sheet and a rock solid track record of cash flow generation. The company has one of the most valuable brands in the technology sector, and a leadership position in markets like smart phones, tablets or digital music. There is really no reason to consider Apple as a riskier alternative than the other tech sector leaders.
I think Apple is undervalued because it had such a fabulous performance over the last years, that investors have not had enough flexibility to adjust their valuation accordingly. The company increased its earnings per share by an outstanding 65% annually over the last five years, and its growth has not decelerated at all lately, 2011 showed an increase of almost 83% and Apple reported a 92% increase in earnings per share during the last quarter.
The following chart compares price, earnings per share and the relationship between those two variables – P/E ratio – for the last several years. Although the price of Apple shares has had a remarkable run from below $100 in 2009 to more than $600 now, earnings per share have increased even faster, therefore the decrease in the P/E ratio.
Such a big company growing at that exponential rate is certainly a very special case; so many early investors may have decided it was time to take some chips off the table and realize their gains. Under the same logic, many others are probably waiting for a pullback before deciding to buy Apple. There is nothing necessarily wrong with that, but it would be smart to keep things under perspective and the concepts as clear as possible.
A stock is not expensive or cheap Based on past performance; valuation is a matter of comparison between the stock price and the company's fundamentals, like cash flows or earnings. Under different metrics, Apple is clearly undervalued, and there is no objective justification for that.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, eBay, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.