Apple’s Fortunes Lie Behind the Great Wall: Part II
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Part I of this article discussed Apple (NASDAQ: AAPL), and the tech giant's focus on implementing its MacBook and iPhone products into Chinese markets. Part II will explore the company's plans for the iPad 3, an Apple black market, and surprising signs that show shares of AAPL are undervalued.
Its no question that Apple's potential deal with China Mobile (NYSE: CHL) is a game changer. Equally as crucial to Apple’s success in China is the iPad, which has a much stronger hold on its respective market, garnering 76% of the country’s tablet market share compared to the Google Android-powered Lenovo (7%) and Samsung (3%) devices. Interestingly, the iPad 3, which has been on U.S. shelves since spring, has yet to be released in China. This explains why tech bulls are clamoring over the recent news that Chinese regulators have approved the newest Apple tablet for sale, though an official release date has not been announced. This side of the Pacific, the company sold 3 million iPad 3’s in its opening weekend, so the hype is warranted.
Now, a potential roadblock for Apple’s tablet is the company’s ongoing legal battle with Proview Electronics, who is claiming trademark infringement for the name ‘iPad.’ The case has already been thrown out in the U.S. courts, though China’s ruling could still be in Proview’s favor. In a move that seems out of touch with their usual antics, Chinese authorities have already announced that they will not ban the tablet outright, because of their citizens’ gushiness over Apple products. Thus, this begs the question: what will become of the iPad’s name if the company is found guilty of infringement? Here’s hoping ‘JobsPad’ and ‘MacPad’ are at least considered.
I’d Give my Right Arm for that MacBook.
While the implementation of Apple’s product lines onto China’s shelves is currently a work-in-progress, the demanders are aplenty. In fact, there have been recent reports of Apple-loving customers willing to sell even their bodies – both in the fleshly and sexual sense – for the goods. All arm hacking aside, an increasing number of techies are turning to the black market to buy the latest iPads and iPhones. In most cases, they fetch as much as $1000 a piece, despite retailing in the $500 to $600 range. Last year, Chinese customs agents seized approximately $300 million worth of the devices in the Guangdong province alone, which accounts for roughly one-fifteenth of the country’s population. When this amount is extrapolated upon, a total Apple black market between $4 billion and $5 billion does not seem out of the question. While it is impossible to determine the exact size of this marketplace, its sheer existence tells us that demand is far outstripping supply.
Apple is Undervalued. Wait, What?
Whether its Apple’s new China-specific features on OSX Mountain Lion, its untapped reserve of 660 million China Mobile subscribers, or its dominant position in the tablet market, the future looks bright for the tech giant’s operations beyond the Great Wall. Surprisingly, valuation indicators show that shares of AAPL may be under-appreciated by the markets. Currently, the stock sports a Price-to-Earnings ratio of 14.0X, which is below its own 5-year historical average of 21.9X.
In fact, Apple’s earnings have historically traded at a 45% premium to the S&P’s average over the past half-decade. This year, shares are much cheaper, trading at a value equal to the market average despite doubling year-over-year earnings last quarter. Specifically, Apple reported earnings of $12.30 per share in the second quarter of 2012, which puts the company on pace to finish the year with an EPS north of $40 for the first time in its storied history. If the official consensus of $47.01 holds, it would mark a 70 percent increase from 2011, and a 212 percent jump from 2010. Using this estimate in conjunction with Apple’s historical average P/E, we can set a price target of $1,029 by next summer. Heck, even if AAPL remains at its current valuation, shares would eclipse $650. The stock currently trades in the $570 range; a return of 14 percent is a nice worst-case scenario.
When earnings growth is normalized, a similar picture is painted. Apple’s current Price-to-Earnings Growth ratio, or PEG for short, is 0.5. Typically, a number below 1.0 is a sign of undervaluation. Moreover, this is also below competitors like Google (NASDAQ: GOOG) at 0.6, Hewlett-Packard (NYSE: HPQ) at 0.8, Microsoft (NASDAQ: MSFT) at 1.1, and Dell at 0.8. It appears that investors have yet to catch up with Apple’s otherworldly earnings growth, which has expanded at an average annual rate of 59.8% since the recession. This too is higher than competitors like GOOG (30.8%), HPQ (0.7%), MSFT (12.9%), and DELL (14.6%). And just to beat a dead horse, Apple’s Price-to-Cash Flow ratio (10.2X) is also below its own 5-year historical average (12.5X), despite the fact that the company is sitting on a mountain of cash nearly $45 billion high. With a recently announced quarterly dividend of $2.65 a share, it looks as though some of this cash will be added to shareholders’ pockets. If you are an investor and don’t own a piece of Apple, take a bite out of the tech giant while it is cheap. Oh, and be thankful you don’t have to sell an appendage for a MacBook; I know I am.
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Fool blogger Jake Mann has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, China Mobile, Google, and Microsoft. Motley Fool newsletter services recommend Apple, China Mobile, 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.If you have questions about this post or the Fool’s blog network, click here for information.