Apple is the Post-PC Juggernaut

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

Now that Apple (NASDAQ: AAPL) has stumbled back to the low $600 region, investors should be asking themselves whether now is a good entry point for the famous maker of the iPad, iPhone, and MacBook. Shares are trading at only 11.7 times forward consensus estimates, and big-time billionaire hedge fund managers like David Einhorn are seemingly in love with the stock. The overarching investment idea is simple: Apple makes blockbuster mobile and tablet devices in a time when worldwide PC sales continue to dwindle. And indeed, according to IDC analyst David Daoud, PC sales dropped 8.6% year-over-year in the third quarter 2012.

We have recommended the stock at 12.5 times its forward earnings as a conservative investment, but there has been a fair amount of headwind lately for Apple's valuation. Analysts have, by and large, overestimated the earnings potential for a number of companies, perhaps including Apple. A Barron's article published over the weekend about the post-PC condition called the earnings slips reported by Microsoft (NASDAQ: MSFT) and the chip makers Advanced Micro Devices and Intel “spooky.”

Microsoft is, for instance, priced at about 9 times forward earnings, which might put it in the bargain bin. Since analyst earnings estimates might be off base, a look at revenue in the price/sales ratio can give us a better valuation idea. When we compare the revenues of Apple and Microsoft, we see that Apple's shares are more expensive in respect to how much revenue the company generates; Microsoft has a price/sales ratio of 3.3, while Apple's is 3.8. But investors are not running to Microsoft. Why?

Apple still might be the best bet for the long-term trend away from PCs and towards mobile devices and “on-demand” cloud computing. Despite the release of the iPad mini—Apple's response to the $100 to $200 eBook reader market—many investors are starting to search for some reasons to buy Apple shares besides their apparently cheap price.

Henry Blodget of Yahoo! Finance was able to name a very important potential catalyst: the release of Windows 8. This new OS from Microsoft will integrate many of the aspects of the tablet form factor directly on PCs, allowing it to be a cross-platform solution. Blodget claims that using Windows 8 is a “confusing experience” even for “die-hard Windows fans.” Some of the features that made Windows attractive for the enterprise segment, including the straightforward and classic Start-button interface, are being eliminated and, in other cases, altered. This could lead to something of an accidental penetration of Apple into the enterprise segment—a segment increasingly committed to a “bring your own device” approach.

Amazon (NASDAQ: AMZN) is a rather direct way to play the post-PC environment, and it is also popular with a number of hedge fund managers. The company does not produce any PCs and, on top of that, seems to dominate every retail market that it enters. Its cross-platform Kindle interface is in no way contingent on PCs, even though it runs just fine on them. Its shares are also retreating at the moment, down about 10% over the past month. The issue with Amazon is that it is not a clear bargain in the way that Apple might be. Amazon trades at 2 times sales (lower than Microsoft and Apple) but trades at more than 90 times forward earnings. At that, Amazon is only apparently cheaper according to price/sales because it runs a business on volume, not margin—less revenue is converted into earnings. That said, Microsoft's Surface might turn out to be a flop at its abnormally high price, so Amazon is still worth a look, if at a lower share price.

We think the upcoming corrections stemming from earnings disappointments are an excellent opportunity to get the most out of a post-PC play long-term. Even if Apple's earnings miss estimates, we think that much of the pessimism is already priced into Apple shares. Apple, in short, combines a promising future with the right price.

This article is written by Brian Tracz and edited by Meena Krishnamsetty. They both have long positions in Apple and Microsoft. The Motley Fool owns shares of Apple,, Intel, and Microsoft. Motley Fool newsletter services recommend Apple,, Intel, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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