Bullish Cross: Apple is an undervalued stock prize

Bullish Cross: Apple is an undervalued stock prize

Summary: In a Thursday post, Apple stock watcher Andy Zaky at Bullish Cross said that Apple is the most "radically undervalued [company] in the tech sector on an objective basis." It is interesting reading.

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TOPICS: Banking, Apple, Hardware
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Bullish Cross: Apple is an undervalued stock prize In a Thursday post, Apple stock watcher Andy Zaky at Bullish Cross said that Apple is the most "radically undervalued [company] in the tech sector on an objective basis." It is interesting reading.

Apple has more net cash than each of the nine big tech stocks, zero debt, trades at the lowest price-to-cash ratio of only 3.79, grew earnings faster than every other tech company except for RIMM, and is generating almost $3.00 per share in free cash flow every quarter. Just to get an idea of how undervalued Apple is compared to others in the tech sector, one need only to consider where these other tech companies would stand if they were valued in the same way as Apple i.e. if those same companies were met with the same general bearishness that Apple is faced with.

Zaky compares Apple with Google, Research in Motion and Amazon and then discusses why Wall Street is so bearish on Apple: Major concerns regarding the health of the consumer and false perceptions regarding Apple's dependence on iPod sales. He finishes up with a week-by-week analysis of the recent sell-off of Apple stock.

The main reason that the market is particularly bearish on Apple has to do with overblown fears regarding a consumer-lead slowdown affecting Apple's business. The idea here is that since consumer spending and sentiment are hitting multi-year lows, Apple's business cannot function at any reasonable level. Many in the market have argued that since Apple is "supposedly" entirely consumer discretionary, that the consumer is going to cut back its spending on products such iPhones and iPods. Many have asked: how can anyone possibly afford to buy an iPod when they can barely afford consumer staples?

This concern is obviously overblown beyond epic proportions. First, while economists have been drumming the recession 2008 beat, Apple's Mac sales, iPhone sales, Mac revenue, iPod revenue, total revenue, EPS, net income, free cash flow, cash growth and iTunes revenue have all been accelerating. Not just growing, but accelerating. There is nothing in Apple's 2008 quarterly earnings reports that have indicated that the consumer has slowed down. At best, the 2008 "recession" has had only a negligible if any impact on Apple's business. ...

I would add a couple of other points to consider when considering Apple's : the changing perception of Apple in the market and the Macintosh.

First, as I pointed out in a recent post on iPhone demographics, when money is tight and purchasing decisions count, consumers don’t want to experiment. They become conservative and in the current market, Apple is the conservative choice for music players and consumer smart phones.

It's a total turnaround. In the early days of client PC computing, it was said that "nobody got fired for recommending IBM." The corollary was that you could get fired for recommending Macintosh or Apple II.

But today, Apple is now a conservative choice, perhaps not for many businesses yet, but in the consumer segment. And it has kept its position in a number of important professional markets.

Second, it appears to this longtime Apple observer -- and one who doesn't own any Apple stock -- that both Wall Street and Main Street have a fundamental misunderstanding of the Mac market: they think that all computers are interchangeable and that Mac users will move over to Windows or Linux machines if and when push comes shove in the budget.

This ignores the fact that the Macintosh is its own hardware and software platform, one that users really like and want to continue using. While some users have left the platform at times, mostly because their companies refused to support the Mac, this prejudice has evolved over the past three or so years.

To Wall Street analysts (and most Windows users), Mac users are more than a little insane and that all computers are alike. The Mac choice is counter to the economic interest where cheaper is always better. This sentiment has been around since the introduction of the PC and the Mac, except instead of Windows, PC users would say that DOS worked fine and was the logical choice for computing.

Today, the Mac is a growing platform, even though customers must pay a "tax" for the Apple hardware and software technology and its level of integration. Half of the Mac customers in Apple Stores are switchers from Windows, even in the latest quarter. No doubt, they would like to pay less for a Mac but they appreciate the value of the products.

Meanwhile, according to Net Applications' OS figures, about half of the Mac user base is still on PowerPC. These Mac customers will likely move their older seats to Macintel over the next year or two.

Like Zaky, I don't understand the bearish view of Apple.

Topics: Banking, Apple, Hardware

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22 comments
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  • uh... math skillz.

    8.23% of the internet using market has any mac.
    5.80 have intel
    2.43 have ppc

    it ain't half :P

    heck its less than a third(29.5%)
    isulzer
  • What absolute garbage...'objective' view?

    What absolute garbage, the only company which is ???radically undervalued [company] in the tech sector on an objective basis??? is Microsoft not Apple. The two grossly overvalued companies are Apple and Google.

    They have 3-4 % of global PC market share for god sake and outside of this they only have the iPod, iPhone and iTunes. That's a pretty narrow line of business.
    Martin_Australia
    • I completely agree

      " the only company which is ???radically undervalued
      [company] in the tech sector on an objective basis???
      is Microsoft not Apple."

      I agree and this is more true when one considers that
      Microsoft is more than twice more profitable than
      Apple in terms of %.
      According to financial rules, the share cost of
      Microsoft should be much higher than the share cost of
      Apple.
      However as speculation and hype are king instead of
      reality, some companies such as Apple and Google
      manage to have higher stock than Microsoft.
      timiteh
      • "Financial Rules?????"

        Really? Do you really think stocks are priced by 'rules?'
        Stock values aren't priced by 'rules.' If there were, we'd all
        be rich, and I'd be retired to Tuscany (I wish).

        If there really were 'rules' that priced stocks, profit margin
        would be a part, but certainly not the only thing that
        determines stock price. Much more important is profit
        [b]growth[/b].

        Now, based on your 'rule,' you are correct: MSFTs profit
        margin is twice that of Apple (so why do people say Apple's
        products are overpriced, when Microsoft is making twice as
        much profit?). But Microsoft's [b]growth[/b] in profits has
        only
        been about 15% for the last 5 years. Apple's has been
        124%. By that 'rule,' which is a better indicator of a
        company's real value, MSFTs P/E of 12 shows it's slightly
        undervalued, while AAPL's P/E of 19 shows it's very
        undervalued.

        Add in the fact that MSFT has about $4/share in cash, and
        AAPL has about $28/share in cash. Now you're actually
        paying less for the business.

        A company needs to show high growth, or a big dividend
        to be really attractive. Microsoft, solid as it is, has neither.
        It's very hard for a company of that size to show high
        growth. That's why slow growers have higher dividends.

        Apple has no dividend, but a very high growth rate.

        That's why it's the more attractive stock.

        Full disclosure: I used to own MSFT (not much), but sold it
        a few years ago. I bought some AAPL (not much) two
        weeks after I bought my first Mac. I've done a fair amount
        of research on both companies.
        msalzberg
        • one fatal flaw....

          When looking at stocks, one is NEVER certain what they'll do as we are fickle beings. And to think financial data are instantaneous is insane; it takes time for data to come in and be analyzed. What comes out today is reflective of the several months past. Sure Apple has had a great run in growth, but let's see what the next few months hold when the data of the present financial crisis come into being. I for one think both Apple and Google are way over valued, they're one trick ponies, and when they can't come up with the next cool thing, they'll tank like any other overly hyped companies in history.
          nothingness
          • Of course we don't know the future. Duh.

            That's why there's the "past performance doesn't indicate
            future results" disclaimer. But we can look at a companies
            business model, and it's financials.

            I'd hardly call Apple a 'one trick pony.' Mac, iPhone, iPod,
            iTunes Music Store, software...

            While Apple's products share their basic underpinnings,
            this is a pretty well diversified tech company. Remember a
            couple of years ago when everyone was moaning that the
            Mac sales weren't growing fast enough, and that the iPod
            was the only thing driving the companies profits? Then the
            Mac sales were the driving force. Now they're complaining
            that the iPod's not growing fast enough, and it's the iPhone
            driving the profits.

            Meanwhile, in the background, people keep buying from
            the iTMS.

            As for being overly hyped, well, hype only lasts so long
            before reality sets in. The iPod has been a major force in
            the MP3 player market for 7 years. Mac sales have been
            growing at an increasing rate, as has the iPhone. At what
            point does 'hype' become reality?
            msalzberg
          • all luxury consumer products...

            No need to be so aggressive to another point of view. From my perspective, all Apple makes are cool electronic toys, yes, even the Mac's are toys for the most part. That's why it is OVER valued because the company itself isn't diverse enough. Look at the MP3 market, it is super saturated, that's why they are hawking the iPhone and pretty much that market will be super saturated too. Remember, I'm not discounting your point of view, just stating mine. Personally, I couldn't careless about ANY company, I have no attachment to big corporations.
            nothingness
          • In what way are..

            Macs 'toys?'

            I use mine to run spreadsheets, databases and CAD
            programs, as well as email and browsing. Same as you
            might, I suspect, on your computer. Now, of course, I can't
            run games as well as a Windows PC, so maybe [b]your[/b]
            computer is the toy,

            My Mac is for work.
            msalzberg
          • GOOGLE ?

            ?I for one think both Apple and Google are way over
            valued, they're one trick ponies?


            Whoah, there ! Boy, am I glad I'm not taking financial
            advice from YOU !

            Leaving Apple aside, let's consider Google. They are
            doing quite well, considering the flaky economy.

            And what Google does, it does very well. I've used various
            search engines lately and still come back to Google.

            The only way Google is going away is if

            a) the Internet really was just a fad after all, or

            b) someone comes up with a better way of fulfilling that
            niche.
            Jkirk3279
    • Thanks for proving the blogger's point

      that bias against Apple isn't rational. The analysis states the
      ECONOMIC reasons why Apple is a solid company to invest in, yet
      you tossed that all out because you are fixed on some stupid
      market share number of 4%.
      frgough
      • No one proved anybody. Speculation

        is the operative term.

        just as the stock priced dropped on "news" that Steve Jobs had a heart attack, Stock prices can rise on the "news" that it is 'undervalued'.

        Well, we will see how many people beleive this gentleman, by keeping a close eye on the stock price.
        GuidingLight
  • Apple is undervalued...

    ...he's right on that, however his reasoning is wrong because Apple's growth, whilst impressive in relative terms, is small in absolute terms and is likely to be capped.

    About $130-140 is probably fair.
    Sleeper Service
    • You can't use absolutes.

      You have to judge things by relative terms. Microsoft is a
      much bigger company. It's five year profit growth has been
      15%. Apple's has been 124%. Are you saying that the
      absolute dollar value of Microsoft's is a better indication of
      the stock's value than the fact that Apple's profit is growing
      at nearly 18X the rate?
      msalzberg
      • Yes...

        ...because using growth rates on limited product ranges with defined ceilings is meaningless, particularly when you're starting from a pretty low point.
        Sleeper Service
        • I don't think you understand...

          the point you think you're trying to make.

          Let's put it in a way you might understand:

          Which is the better stock to buy; one in a company that
          made $100m profit last year, or one that made $10m
          profit? By your metrics, the company that made $100m is
          the better buy. But what if last year that company made
          $125m profit, and the other only made $5m? Is it still the
          better buy? Without any further investigation, again by
          your metrics, the company with the absolute bigger profit
          is the better, even though it's profits dropped by 20%, and
          the smaller company's profits grew by 50%. It is the
          [b]rate[/b] of growth that is important. [b]Relative, not
          absolute.[/b]

          By the way, most companies go through several phases,
          where they go from high growth to slow growth. I'd
          suggest a good beginner's book for you: "One Up on Wall
          Street," by Peter Lynch.

          As for 'defined ceilings,' I have no idea what that means.
          Everything has a defined ceiling, since nothing's infinite.
          msalzberg
          • When you're finished patronising...

            ...you might want to look up the definition of 'defined' and 'ceiling' and then apply that to growth.

            That's where the value of $130-$140 comes from. Any higher is, frankly, absurd based on realistic future market share.

            Seriously.
            Sleeper Service
          • So, what is the...

            realistic future market share? Please tell us. And please
            tell us the basis for your estimate.

            Again, stock prices are driven by earnings and profits. A
            large market share does not necessarily mean either (e.g.,
            General Motors).

            Now, if you're basing your $130 - $140 cap on the market
            share, does that include the $28/share of cash that you
            get? There have been instances of companies' stocks
            selling for less than their cash holdings. If you say $130,
            do you mean $158?

            If I sound patronizing, it's only because you make no
            sense.

            By the way, if the [b]absolute[/b] profit is all that matters,
            and not the [b]relative[/b], why are stock charts
            logarithmic? Just asking.
            msalzberg
          • Well...

            ...iPod sales are increasing but at an expected rate with peaks for product refreshes, the iPhone has a fairly defined lifecycle which, because of the subsidies AT&T had to pay to get it means that this will be 18 months and, as we know from IMEI numbers, burn rate is decreasing (although Apple's launch in 70 other countries will allow for a further peak) and Mac sales aren't going to realistically achieve more than a 6-7% global market share based on pricing growth is goping to be nice but not spectacular.

            So, based upon the market cap and P/E ratios of their competitors when they reach saturation point $130-140 seems about right.

            Of course I could be talking a load of bollocks. Heck, most of the professional analysts do.
            Sleeper Service
  • Apple is growing, so stock prices should balloon

    Who knows how big Apple could get? Lets triple the stock price just in case!!!
    T1Oracle
  • More conservative in a recession

    Which is why SUV sales are booming. They're the conservative choice.
    jepzilla