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Black Friday Deal: Apple Shares 35% Off

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) is firing on all cylinders, but its stock has lost its flame. In fact, it's down over 15% since its high of $700 just two months ago. An Apple Maps hiccup, weaker than expected iPhone 5 sales in FQ4 (though still a 58% year-over-year unit sales growth), and a general decline in the market have weighed heavily on the stock. But is there merit for such a severe sell-off? When Apple shares were hovering in the 520's one analyst called the sell-off "insanely insane." The shares rebounded over 5% the same day, but they are still trading at a significant discount. In fact, I believe Apple shares are trading at a 35% discount to fair value.

There are many reasons I believe Apple's shares are undervalued, but I've narrowed it down to six compelling arguments:

Tis' the Season with iGallore

It's no secret that this holiday season is packed with new Apple products for holiday shoppers to get their hands on. That's usually the case every holiday season. But this holiday season Apple's product launch schedule is on steroids: the iPhone 5, 4th generation iPad, iPad Mini, 13" Macbook Pro with retina display, new iMacs, a new iPod line-up, and more. To put this in perspective, Tim Cook explained during the earnings call that Apple is projecting 80% of its revenue in FQ1 to come from new products.

And demand will likely not disappoint. According to a study published on Nov. 20, 4 out of the 5 most wished for gifts by children for the holidays are Apple products. The iPad takes the top spot among both children and teenagers for the most-wished for gift.

All this should result in a large year-over-year increase in revenue and earnings in FQ1.

China's Apple Crazy

Apple's TTM revenue is up 78% in China, and there aren't any signs of a slowdown. In fact, many analysts believe that China's largest carrier, China Mobile (NYSE: CHL) will finally get the iPhone sometime in 2013. China Mobile's 645 million customers (twice the population of the United States) is a goldmine. Many analysts agree that tapping into China Mobile would give a large lift to Apple's stock.

Growth in Apple's Asia-Pacific segment will likely have an even larger influence on bottom line growth in 2013 as it continues to increase as a percentage of total revenue: In 2009, Apple's Asia-Pacific sales represented just 7% of revenue. Now, Asia-Pacific sales represent 21% of revenue. China itself will continue to have an even greater influence on this segment, given that TTM sales in China were up 78% in 2012 while the segment as a whole was up just 47%.

Customers are Pleased

iPhones, which represent over 50% of Apple's revenue, and an even larger percentage of earnings, are the most watched Apple product by investors and analysts. In order for Apple to maintain strong market share, it's important that Apple continues to deliver an incredible product with an awesome user experience. According to customer satisfaction surveys, Apple is not falling short. A recent report by JD Power found that for the 8th consecutive year, Apple ranked highest in customer satisfaction among smartphone manufacturers.

Apple's Strong Retail Presence

Apple's retail stores are extremely successful. In fact, measured by sales per square foot, they are the most successful stores in the world. To put the icing on the cake, the world's second most successful retail store, Tiffany & Co., had sales per square foot 50% less than Apple. With over 390 stores, no other tablet or smartphone competitor comes close (other than Barnes & Noble). Microsoft (NASDAQ: MSFT) has just 30 retail stores. Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) depend entirely on online sales and third party resellers.

Apple's impressive and numerous brand-showcasing retail stores in prime locations enable Apple to connect with new and existing customers in a way that competitors can't. As Apple continues to aggressively expand its retail presence all over the world, Apple opens the doors to connect with more and more new customers on a deeper level.

Rumors

Rumors definitely should never be treated as facts. But even if just some of the rumors surrounding Apple's plans for 2013 came true, investors should be rewarded handsomely.

Apple analyst, Gene Munster, attempted to paint a possible picture for Apple in 2013 based on rumors and talk with suppliers:

  • March, 2013: iPad Mini with retina display, Apple TV box (open to developers for the first time), possible streaming radio service similar to Pandora
  • June 2013: iOS 7 and OSX with Jony Ive influence, Macbook Airs with retina displays
  • September 2013: iPhone 5S, new iPad redesigned to reflect iPhone 5 and iPad Mini
  • November 2013: 42"-52" Apple TV launches
The big question mark here is obviously the possible TV. Without it, it will be a great year. With it, Apple investors can partake in the bonus.

Valuation

Trading at just 12.7 times earnings and with a dividend yield of 1.9%, the recent sell-off presents a great opportunity for investors to jump in. When compared to its peers, Apple appears even cheaper. Measured by free cash flow (FCF) yield, the market is paying a significant premium for growth tech stocks Amazon and Google over Apple (see chart below). The FCF yield shows you what percentage of a company's share price is represented by the cold, hard cash it's churning out. The higher this percentage, the better.

<img src="http://media.ycharts.com/charts/82a142b9c785823b5e04619c118ee808.png" />

AAPL Free Cash Flow Yield data by YCharts

Despite a conservative valuation with little growth assumed by the market, Apple has grown much faster over the past three years than both Google and Amazon (and of course Microsoft):

<img src="http://media.ycharts.com/charts/c2a1793b085f605e10a94a7098361b35.png" />

AAPL Book Value Per Share data by YCharts

Growing fast, and trading like it's not: Apple is cheap.

The bottom Line

So there you have it, six solid reasons why I believe Apple is undervalued and deserving of a higher price tag. While you're out taking advantage of the awesome Black Friday deals, don't forget to pick up another share of Apple. Next Christmas you'll likely be very glad you did.


DanielSparks owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, China Mobile, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, 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!

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