Apple Shares Could Double From Here
Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There was a time when bullish notes on Apple (NASDAQ: AAPL) didn't seem to catch a break, but after the first-quarter earnings; the entire social media is now littered with all the investors' pessimism and analysts' downbeat reviews that one can think of. Despite the potential future earnings power, a solid dividend, and Apple's ability to innovate, shares are trading near 52 week low. Investors seem to be on an emotional roller-coaster ride, with some suggesting that Apple growth story is over, while some proclaim that this discount afforded by the post-earnings sell off is a once in a lifetime opportunity.
Arguments from Apple bears
Doubtlessly, Apple faces a multitude of competitors. Fear is whether Apple has lost its technological edge, and whether Google’s (NASDAQ: GOOG) Android devices and maybe Microsoft’s (NASDAQ: MSFT) Windows mobile devices will eat into Apple's growth opportunity. Google's Android has now captured 70% of the global smartphone market share compare to Apple iOS, just under 20%.
Moreover, Microsoft Windows 8 has now entered the smartphone software market; and with a recent collaboration with Nokia (NYSE: NOK) , Microsoft's Windows 8 will be able to get improved hardware support and is expected to give strong competition to Apple iOS and Google's Android. Nokia itself is under immense pressure as the Finnish firm's near term goal is to at least survive in the smartphone territory that, at the moment, is dominated by Apple and Samsung handsets.
There are also questions about whether China Mobile (NYSE: CHL) and Apple will agree on an iPhone deal or not. Many analysts have suggested that China Mobile, the world's largest cellular provider by subscribers, won't be inking a licensing deal with Apple on the iPhone 5 anytime soon. There're also fears of the iPad-mini cannibalizing iPad sales, and the future exacerbation of margins from a possibly lower cost iPhone.
Cheap as chips
First, investors need to focus on Apple as emotionless as possible. The company has a big market base; millions of people still use iPhones, iPads, and iPods. Fears of market saturation and slowing growth are nothing but over exaggeration -- analysts still expect the company's sales to grow over 15% this year. I believe Apple, like always, will adapt to competition very quickly.
Apple currently has almost $150 in cash per share -- almost one third of the current price per share. Shares currently trade at 10 times trailing earnings and 6.8 times trailing EBITDA -- the lowest since the financial crisis of 2008.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of 10% to 15% on Apple. The company currently has a cash flow margin of 30%. Longer term, though, I believe the company can leverage better cash flow from its operations -- it can boost that margin into the mid-to-high 30s.
I expect Apple to grow its cash flow at a 10%-12% rate for the long term, which will lead to a steep looking compound cash flow growth rate of over 15%. Discounting that back using a WACC of 10%, it suggests a fair value of about $900; or almost double from the current level. In other words, the stock is priced for more than 30% annualized returns in the next three years if you buy at the current share price, assuming sales and cash flow grow as stated.
Based on several financial metrics, shares of Apple currently appear quite cheap. Stocks like Apple don't often give investors a chance to buy at such a substantial discount to a fair value, so this sell off is certainly a tempting opportunity. I think, Apple's share price will continue to rise over the next few years. All told, I believe Apple shares could double from here.
MaaniValueGuru has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, China Mobile, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!