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Apple: Still The Cheapest Stock On Wall Street

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

On Monday, Fool’s contributor, Meena Krishnamsetty raised an argument suggesting that Apple (NASDAQ: AAPL) was not as cheap as Wall Street claims. However, upon reading the article I left thinking that Apple is even more undervalued than I thought.

Krishnamsetty cited the Street’s view on the stock along with a few estimates as follows:

  • According to Thomson/First Call 48 of the 58 analysts covering the stock have a buy or strong buy rating on the stock. Apple’s one year median price target of $750 is also 47% higher than its current price. Analysts also expect that Apple will make $49 in its current fiscal year ending September 2013 and $57 in FY2014. Even the most bearish analyst thinks AAPL will earn $41.75 in FY2013. So, according to Wall Street Apple’s forward price-earnings ratio is at most 12.

The article was published on Monday prior to market open with Apple having closed the previous session at $509.59. Suddenly the market woke up. Apple soared over 5% - reaching a high of $535.40 - closing the year at $532.17 upon gaining $22.58, or 4.43%. It seems that Wall Street realized that Apple was cheap after all. At the very least, investors realized that $509 was too much to pass up. But let's reflect.

As evident by the stock’s 30% drop from a high of $705 to $500, it is clear that the market had already become more pessimistic about Apple’s ability to grow earnings into 2013. This is despite strong Q4 sales figures during which revenues surged 27% year-over-year, while profits grew by 23%.

Nonetheless, Apple was able to do this as every analyst screamed “cannibalization.” Aside from what I believe has been an exaggerated market selloff due to “fiscal cliff” concerns, analysts have also rushed to revise estimates while distressing over the company's margin compression.

For instance, while reiterating his buy rating on the stock, Abhey Lamba of Mizuho Securities saw fit to also cut his price target by $150 from $750 to $600, which didn’t make any sense. He argued that near-term headwinds from potential F2Q13 estimate cuts combined with lack of material upside to FY13 estimates will make it harder for the stock to revisit its all-time high of $700. But he’s wrong.

Bernstein analyst Toni Sacconaghi also trimmed his target from $800 to $750 while cutting FY 2013 estimates from $50.57 to $49.41 per share while citing slower growth of 22%, down 5% from 2012. However, Citi then followed with a hold rating with $575 price target – citing rising iPhone and tablet competition from the likes of Google and Microsoft.

Then came RBC Capital’s Amit Daryanani, who trimmed EPS estimates citing (among other things) iPad 4 cannibalization. Daryanani cut his price target on the stock from $750 to $725, but maintained his outperform rating. In other words, where is the evidence that Wall Street is yet making claims that Apple is so cheap?

In fact, there is a growing consensus and a concerted belief that Apple will not be able to sustain its growth momentum. So the idea that at $509 the stock still “wasn’t cheap” enough was beyond absurd. What more evidence does one need following a 30% correction to suggest that the market was no longer disillusioned with Apple’s aura.

What’s more, the article was void of any realistic target suggesting where the stock should otherwise be if it was not cheap enough. Would it need to go to $400? This question was posed – I’m still waiting for an answer.

Another popular notion was that the company was beginning to lose its edge to Google – except it’s not true. Apple continues to dominate Google in U.S. smartphone sales – reaching 53.3% market share. This is according to a report released last week by Kantar Worldpanel ComTech, which tracks sales data for the most recent 12 weeks.

Likewise, another myth is that Microsoft’s Windows 8 and Surface tablet are taking bites out of Apple. Both Surface and Windows 8 have underperformed since their respective launches. Consumers and enterprises have not adopted them as quickly as Microsoft had hoped – leading to much lower than expected PC sales for the quarter. Is Microsoft still a threat?

For that matter neither is Research In Motion (NASDAQ: BBRY). Although RIM is starting to gain some traction with BB10 and having sold 7 million BlackBerry phones in its most recent quarter, I don’t think anyone believes it is sustainable – particularly with the company’s recent concerns over services revenue, which is now under change.

Bottom Line

Apple is still the gold standard and the most polarizing stock on the market – bar none. As evident by the 5% climb on Monday, it seems that the market has realized how irrational it has been. I also think the market is smart enough to know that Apple is going to blow the doors off its Q1 numbers after a strong holiday quarter. The stock will regain $600 this month and make a new 52-week high before March – proving that Apple is still the cheapest stock on the market.


rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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