There's More to Tech than Apple - Here's Proof

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

In the midst of highly uncertain demand, technology has seen dramatic innovation. If that is not good proof of corporate trust in the long-term, then I don't know what it is. The problem, however, is that some investors have not done the same. Instead, investors have been surprisingly myopic and have been "hooked" into who's released the latest cool gizmo (*cough* Apple). I advise steering away from the herd, and buying shares in firms with proven but under-appreciated fundamentals.

Microsoft (NASDAQ: MSFT): Under-Appreciated, Under-Recognized, Undervalued

I will be very open about it: I think Microsoft is one of the most undervalued stocks, not only in technology but also on the Street. With the market going wild about everything Apple, it is surprising how much it has, perhaps unconsciously, dismissed Microsoft's near monopoly on the operating system for PC market. Yes, we all know the conventional wisdom that PCs are doomed. But in reality, they provide a good launching pad for expanding onto different business segments. It should not be surprising, for example, that Microsoft's low-cost Surface tablets will go on sale at the same time as Windows 8 does. Both have the same layout, and they complement each other.

For years, Apple has been a market leader in keeping everything integrated. With the introduction of Surface tablets, Microsoft now has a way to cross-promote its operating system. In addition, the company is making value-creating acquisitions, such as the purchase of PhoneFactor, to integrate itself into business apps, cloud services, and mobile developments. At only 9x forward earnings, you get excellent exposure to not only an excellent foundation, but also strong expansion opportunities.

IBM (NYSE: IBM) & Apple (NASDAQ: AAPL): Good But Too Expensive

By contrast, IBM and Apple may both be well-run companies, but they are all overvalued compared to Microsoft. IBM trades at a respective 15.3x and 12.6x past and forward earnings, versus corresponding figures of 15x and 12x for Apple. Especially for Apple, the $600 billion market suggests that the "law of large numbers" will constrain growth. No matter, analysts forecast 22.4% annual EPS growth over the next 5 years!

Personally, I find that the bar has been set too high for Apple. While iPhones and iPads may have created a short-term stream of demand, innovation in technology is abundant. Even if Apple were to become the first trillion-dollar company by 2016, it would, based on a 10% discount rate, be worth only around 3% more than its current market cap in present value terms. In the absence of a meaningful dividend and in the presence of a high bar, is this company worth jumping into right now?

At least IBM can boast being an attractive "bank" for storing money--just ask Warren Buffett. Like Apple (although not as dramatically), IBM has consistently improved earnings. But with a beta of 0.7, IBM is a much safer stock. It trades at a respective 15.3x and 12.6x past and forward earnings, and analysts forecast 10.1% annual EPS growth over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $22.20.

At a 16x multiple, this translates to a future stock value of $355.20. Discounting backwards by 10% yields a present value of $220.55, which is not at a meaningful premium to the current market price. Accordingly, I recommend only holding the stock as a way to keep your money safe.

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TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, and Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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