Does Apple Deserve its Low Valuation
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm sure many investors wonder why a company like Apple (NASDAQ: AAPL), which continues to produce record results, which is literally on the cutting edge of the tech world, has a price to earnings valuation of less than 16, while Amazon (NASDAQ: AMZN) maintains a PE of over 300. In a recent article penned by Rocco Pendola, he did his best to defend Amazon's valuation, explaining that Jeff Bezos ethos from the outset was to continually reinvest his revenues into technologies and applications that would make him money in the future. This is why Amazon sells the Kindle at just about cost, hoping to enlist the user into their ecosystem, as they use their tablet to buy e-books, Amazon video, and order household goods from the Internet's dominant retail site.
The challenge in producing very little in the way of positive cash flow is that it's becomes very difficult to gauge the true worth of the company. Would Rocco still be extolling the virtues of owning Amazon stock if it was trading at 1000 times earnings, at a million? As an investor, I simply don't know enough about the company's finances to be able to make a confident investing decision. As a consumer, I genuinely enjoy shopping at Amazon, though Walmart.com does frequently beat Amazon on price, which has an extra crimp in me exercising my buy finger for Amazon stock. Apple on the other hand has set record earnings quarter after quarter, and has amounted the biggest cash horde in the Universe. This prompts many investors to look at Apple's stock, its valuation, and ask the question, "why so cheap?"
While Apple has been ahead of the tech curve at every moment, and consistently produced the best product, in the face of outlandish profits the nature of capitalism is to attract competition; it's like blood in the water for sharks. The simple fact is that the Amazon Kindle, and Google Nexus (NASDAQ: GOOG), now are starting to pose a real threat in the tablet game, occupying the 7-inch space that Apple formerly had not, in addition the high-end knockoffs, (the Microsoft Surface (NASDAQ: MSFT) the Samsung Galaxy, etc. etc. They're closing the gap quickly in terms of quality, and best Apple on price.
There's absolutely no doubt my mind that Apple will always have its loyal fans, and deservedly so. I have friends that will purchase nothing but Apple. They are the well to do consumers that every business lusts after. However, this represents only a small segment of the population, and there are many current users who have not completely consumed the Apple (forgive me, I couldn't resist) and are "ripe" for the picking as the competition improves their product, and under-prices them. Heck, part of the reason that Microsoft originally supplanted Apple in the PC wars was due to systems running Windows being cheaper.
And that's not even mentioning the Android smart phones which are giving Apple a real run for its money, or the Windows based Nokia phone which has received rave reviews, albeit with little fanfare from the consumer.
A Grand Slam Everytime?
The simple truth is that Apple will have to continually come out with grand slam products, game changers in the industry. While I do believe that the iPhone 5 will set record sales, and is certain to be a fabulous product, it is not a game changer in the same way that the iPad, or the original iPhone were.
Will Apple come out with more revolutionary products? That is the big question; has the talent that Steve Jobs amassed going to continue to set the industry on its head every couple of years with truly innovative products? If you believe yes, then Apple's stock is cheap at 16 times earnings.
If you think it unlikely, if you think some upstart might come along and take technology in a whole different direction, much in the way Apple did years ago (and for all practical purposes, continues) then as the competition eats away at Apple's enormous profit margins, which I do believe will take place, then at 16 times current earnings, Apple is likely fairly priced. At minimum, let this be food for your investing thought.
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margiecfl owns shares of Google and Microsoft. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.