Apple and the Mayan Apocalypse
Erick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gentle reader, I know what you are thinking, yet another boring article about Apple (NASDAQ: AAPL). I want to dispel such silly notions. Yes, we are going to talk about Apple and Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) and perhaps another few companies, but this is about the end of the world as we know it coming to you on Dec. 21, 2012.
I am writing this in the morning so I don't really know if there will be a Dec. 22, 2012, but since you will be reading this sometime in the future you can let me know in the comments section if we are being attacked by a horde of zombies. You did invest in precious metals, didn't you?
Back to Apple, and a discussion of its current stock price. There are quite a few reasons that Mr. Market is heavily discounting Apple, some of them justified, some of them not. As a long-term investor in the company, I try to buy at times when I see fear and I now see a price mismatch from the fundamentals.
In the case of Apple, there is a lot of uncertainty as to what comes next for the company. There has not been a revolutionary product since the introduction of the iPad, and for some reason Mr. Market expects these life-altering products to magically emerge every few years. With no Steve Jobs at the helm, Apple has shifted into an evolutionary company. This means that it is slowly evolving its products through iteration. I argue that this has always been the case, but some products are more revolutionary than evolutionary.
What does all of this have to do with the Mayan Apocalypse? Wel, Mr. Market is basically pricing an end-of-the-world valuation for Apple. They are assuming that Apple's growth will cease in the next two to three years and that it will go the way of other big companies such as Microsoft (NASDAQ: MSFT) or Cisco (NASDAQ: CSCO), both of which got to the top of the world in terms of market cap only to then crash down to Earth.
Both Microsoft and Cisco are solid companies paying good, steady dividends and with steady cash-producing businesses, but their growth days may be well behind them. Cisco is giving you a 2.8% dividend yield with a PE of 13, Microsoft a dividend yield of 3.4% and a PE of 15. Apple at a current PE of 11.82 (dividend yield and PE data from Yahoo! Finance) and with a current dividend yield of 2%, looks to me like a screaming buy, but external factors (fiscal cliff, for example) are giving Mr. Market a severe case of myopia. Compared to both Microsoft and Cisco, both much slower growers than Apple, I see the valuation of Apple to be extremely compelling.
Here's why I think Apple will continue to produce better than average returns for investors for the next five years or so (my crystal ball gets awfully fuzzy after that):
1. Attractive valuation, cash flow and balance sheet
Apple is selling for dirt cheap, has no debt, mountains of cash and pays a good dividend, which is likely to increase in the future. That alone should justify the company selling for a market-average PE ratio of about 15. Compare that valuation to its main competitors: Google sells for a PE of 22 or so and Amazon for a ridiculous PE of greater than 3000. As growth slows for Apple, that cash horde should be converted into dividend payments to shareholders. You can then take that cash and invest in precious metals as you prepare for hyperinflation and you can also buy weapons and other survival supplies to prepare for The End of Times.
2. Premium brand with good growth potential in emerging markets
Apple's products are affordable luxuries. The brand is one associated with a premium product, one that can be afforded by most First World consumers. As Apple forges ahead, it tends to discount the old versions of its products, and this is what has happened with iPods, iPhones and iPads. For example, as the new retina display iPad 4 emerges, the iPad 2 gets put on the clearance bin, and is snapped up by Thrid World consumers who are increasingly getting an appetite for premium American brands. True, Apple's margins will go down over time, but the penetration of Apple's products are low in emerging markets and as such they should be able to offset the effect of the lower margins by increasing their volumes and as a consequence their overall revenues.
3. Apple products are addictive and their ecosystem is without peer
The real battle for the soul of the consumer is being fought right now by three companies: Apple, Google and Amazon, each with its own strategy. Apple gives you highly addictive integrated products with an unmatched ecosystem of apps. Google and Amazon are not far behind in this regard, but they have not caught up to Apple. All three companies are battling fiercely to get you to buy their devices and get you hooked into their web of apps and content. Apple is strongest in music and number of apps. Google is an open platform that sucks you in through Search and Gmail and their Android ecosystem, which is no slouch in terms of apps and functionality. Amazon is strongest in books, and is making waves with its Kindle Fire, which is sold at a loss in order to suck you into Amazon's own rich ecosystem of content. Apple products are designed with planned obsolescence in mind -- after a while Apple stops allowing iOS upgrades to the older models and in order to get the cool new features you have to buy a new iDevice (my iPad 1 still works very well, but is no longer updgradeable and remains at iOS 5.1).
In summary, I think that Apple has steady growth remaining for a few years, especially given low penetrance into emerging markets and the upgrade cycle present in First World markets. Apple's valuation is very attractive at these prices. Compare the yield on Apple and a 10-year U.S. Treasury bond. If the world does not end today I am betting my money on Apple.
Fool blogger xerohype owns shares of AAPL, GOOG and AMZN. He owns no shares of MSFT or CSCO.