Time To Buy Apple - Too Cheap

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

It wasn’t long ago that people were screaming that Apple (NASDAQ: AAPL) was headed to $1,000 a share, and that the iPhone 5 would propel the shares further into the stratosphere. I was one of the few dissenting voices at the time who stated that Apple’s ultra-high margins were a result of being first to market with incredible new and novel products, and invariably, where there are large profits, the competition swoops in like a laser beam to try to get in on the action, which works out nicely for consumers. It’s not all that easy to continually create a new iPad or iPhone, and the price and valuations at the time didn’t make it worth the risk. Needless to say, Apple fans and investors had few kind words to say. 

Now analysts, who only a few months ago were touting Apple as surefire winner, have revised their estimates downwards, and there is a new echo that Apple needs a new WOW product. 

I'm going to address this and more, with a simple and quick evaluation of Apple's stock and where it is headed-

Cash: Need Tim Cook to write you a check? Before this earnings report, the company had $121 a share in cash. With whatever free cash flow the company added to its books, that means that cash levels will easily breach 25% of the company’s market value. That is cash.

Plant, property, equipment: I’m not going to bore you with these figures, but they certainly are worth a good chunk. The value of a company is not based solely on cash flow.

Growth: Apple trades at less than 10x earnings. The company has stated conservative estimates of growth for the coming quarter.  

This quarter’s numbers, Quoting Yahoo Finance: “Revenue was $54.5 billion, up 18 percent from a year ago. Analysts were expecting $55 billion. Sales were held back by the fact that the latest quarter had 13 weeks, one less than the corresponding 2011 quarter.”

And the stock plunges 10%?

Dividend: At $460 a share there is a not insubstantial 2.3% dividend; higher than a ten year treasury. Based on the fact that the market seems to discount Apple’s pile of cash. As a shareholder, at least you’ll be paid to wait.

New Products: During the earnings call, Tim Cook addressed the product pipeline, "We're working on some incredible stuff. The pipeline is chock full," he said.

So, a billionaire CEO is going to say this to intentionally lead investors astray? I want to stress, it takes years to fully develop a new product. You don’t dream up a piece of hardware, and two weeks later it's out in the market place. Assuredly, the current pipeline has products that Steve Jobs had a hand in conjuring, including the new version of Apple TV which he bragged about in his biography.

Market Psychology:  The number of “Apple sucks” columns and negative commentary from brilliant CNBC analysts are on the rise. This really doesn’t represent a fundamental change in the company over the last few months in my opinion, just a shift in psychology. Yes, Apple messed up badly replacing Google Maps with its own offering, and yes, Google’s Android system dominates in market share, and competitors such as Microsoft and Nokia are doing all they can to catch up with their surprisingly well reviewed Windows 8 phone, but is Apple really so much worse off than a few months ago?

Margins: During the Christmas season, Apple, notoriously rigorous on the prices resellers are allowed to list their products for agreed to allow Walmart to discount the iPhone 5. This immediately should have told most analysts that Apple was facing margin and competitive pressures. I DO expect further margin pressures, especially as Apple releases the non Rolls Royce version of their phone to compete with Google. 

Bottom Line: Competitive pressures are there, Apple’s margins WILL decline until they release their new WOW product. I’m going to trust Tim Cook and believe new products will arrive. I’m going to try to catch a falling dagger, and even if it goes down to $400 a share, it’s my belief that at these prices, the valuations more than justify the risk.

 If you have a useful insight or thought, feel free to leave it in the comment section below. 

margiecfl has a long position in Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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