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Apple is Oversold. Thank You, Mr. Market

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

Over the past 12 months, investors could have bought Apple (NASDAQ: AAPL) shares for $450 in January 2012, $700 in September 2012, and again for $450 in the past week. These enormous fluctuations, to the tune of hundreds of billions of dollars, are a stark reminder that Ben Graham's favorite allegory – Mr. Market – lives on. As Graham explains him, this colorful character shows up every day to buy or sell shares for different prices. Even better, Mr. Market is faithful. No matter how you treat him or how long you ignore him, he just keeps showing up.

Such irrational behavior works in favor of the patient, long-term investor. By taking a fundamental, or evidence-based approach to investment decisions, investors can exploit the market's shortsightedness.

In this article I'll filter out all the noise and look at the evidence: Three facts point to a clearly oversold Apple stock.

An Evidenced-Based Approach

Fact 1: Apple's ecosystem is growing stronger.

In a recent press release, Apple announced that over 300 million Apple devices are now running Apple's latest version of iOS, making iOS 6 the "most popular new version of an OS in history." Then, of course, there's the iOS App Store with 800,000 iPhone apps and 300,000 native iPad apps available for customers to choose from.

Also, Apple's cloud-based services continue to strengthen, adding to the Apple experience. As reported by iPodNN, impressive numbers abound: iCloud users have grown from 85 million to 250 million over the past 12 months. iTunes, driven by a whopping 500 million accounts, added a nice $2.1 billion to the bottom line in Apple's fourth quarter alone.

Fact 2: Scale remains in Apple's favor – especially in the tablet market.

Though Samsung did outsell Apple in smartphones during the holiday quarter, Apple trumped all other tech companies in terms of profits. Samsung's December quarter earnings fell short of Apple's by $5 billion. Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) fall even further behind, with earnings of $2.9 billion and $97 million, respectively – compare these numbers to Apple's massive $13.1 billion in earnings.

As far as tablets go, Apple is the clear market leader. The company has sold over 120 million iPads, 22.9 million in the last quarter alone. According to a supplier, Google barely surpassed one million monthly Nexus tablets sales for the first time in December. Even Samsung's tablet sales pale in comparison to Apple. According to sales numbers revealed in an ongoing trial between the two companies, Samsung tablet sales represent around 4% of Apple's iPad sales.

With 500 million iOS devices sold (75 million in the December quarter alone), Apple possesses significant scale in mobile hardware.

Fact 3: Fundamentally, Apple is a "buy."

In Apple's December quarter, the company faced extremely tough triple-digit comparisons. For instance, in the year ago quarter Apple reported 128% and 111% year-over-year growth in iPhone and iPad sales, respectively. Despite such tough comparisons, Apple still managed to increase revenue and maintain earnings.

But even if the stock is doomed to single-digit growth rates going forward, that's OK – at today's valuation Apple doesn't need growth to reward investors.

As far as profitability and operational efficiency, Apple is an outstanding performer measured by almost any metric.

For instance, Apple manages to convert 28 cents of every dollar of sales into free cash flow (FCF). Compare this to Google and Amazon's FCF-to-sales ratios of 26.5% and 1.7%, respectively. Apple's FCF-to-sales ratio of 28% is especially impressive when considering the fact that Apple derives the majority of its profits from selling hardware. Plus, the company's ability to generate high amounts of FCF make the stock a great income investment with a high probability of a dividend increase in the future – especially in light of the firm's extremely low payout ratio of just 6%.

The Bottom Line

The facts aren't yet pointing to a decline. More precisely, the facts seem to paint a picture of continued growth. With an ecosystem in its prime, massive scale (especially in the tablet market), and a super-cheap stock, it looks like Mr. Market might have overreacted to Apple's December quarter results.

Do you disagree? Agree? Let's talk facts in the comments below.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, 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.

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