Apple is Undervalued: Five Straightforward Reasons

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

At yesterday's closing price of $529 per share, it's a great time to re-evaluate Apple's  long-term prospects. To no surprise, it seems that the fundamental drivers of the stock are still intact, despite the recent decline in the stock price. As the stock trades at its lowest levels in the last nine months, the disconnect between the value of Apple's business and the stock price has grown wider. I can't say it any more bluntly: Apple is undervalued. I'll give you five straightforward reasons why Apple is a great long-term investment at $529 per share.

1. China Mobile: Many analysts believe that China's largest carrier, China Mobile, 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.

2. Pricing Power: In an interview with the Financial Crisis Inquiry Commission, Warren Buffett said that “The single most important decision in evaluating a business is pricing power." Apple's profit margins are the envy of the industry. At 43.87%, no competitor even comes close. Consumers are willing to pay significantly more for Apple's products.

3. A Massive Market: Apple analyst Andy Zaky explains that Apple is far from reaching market saturation: "Understanding the size and scope of Apple’s operating market is the key to understanding how far Apple will go." Don't forget that Apple's mobile phone market share is only 6%.

4. Retail Presence: No other tech company has a retail presence like Apple's. Its brand show-casing retail locations give Apple a way to connect with customers in a way competitors can't. At an average of 8,400 square feet per store, Apple retail stores are the most successful retail stores in the world when measured by sales per square foot.

5. Lucrative Opportunities: With over $100 billion in cash & cash equivalents and, according to Forbes, the world's most powerful brand, there are plenty of ways Apple can use its money to create more shareholder value. According to a study by Morgan Stanley, Apple could sell as many as 13 million Apple-branded TV sets if Apple were to launch one. In a recent Rock Center interview with Apple CEO Tim Cook, Cook expressed that television is an area of "intense interest" for Apple.

A Compelling Valuation

Measured by my favorite, straight-forward valuation metric, free cash flow (FCF) yield, Apple is available at a great price. 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. Let's compare Apple with some other wide-moat, mega-cap stocks: Google (NASDAQ: GOOG), Wal-Mart (NYSE: WMT), McDonalnd's (NYSE: MCD), and Procter & Gamble (NYSE: PG).

<img src="http://media.ycharts.com/charts/bf4060a3a37a2f36e32147a08ad34db5.png" />

AAPL Free Cash Flow Yield data by YCharts

Apple trades at a more conservative valuation, measured by free cash flow yield, than all four of these other companies even though Apple is growing at a much faster rate (see below).

<img src="http://media.ycharts.com/charts/d33485f9c950d285543f360e9760e198.png" />

AAPL Book Value data by YCharts

The Bottom Line

The short-term is always full of surprises. But in the long-term, there is still upside left in Apple's stock. Even more important, these five straightforward reasons that Apple is undervalued will minimize any downside risks.


DanielSparks owns shares of Apple. The Motley Fool owns shares of Apple, China Mobile, Google, and McDonald's. Motley Fool newsletter services recommend Apple, Google, McDonald's, and The Procter & Gamble Company. 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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