Is Apple undervalued?

Is Apple undervalued?

Summary: One Seeking Alpha contributor looked at Apple through the lens of Warren Buffett's Buffettology principles. To no surprise, he mostly likes what he sees. Of course, Buffett ain't having any of it.

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One Seeking Alpha contributor looked at Apple through the lens of Warren Buffett's Buffettology principles. To no surprise, he mostly likes what he sees. Of course, Buffett ain't having any of it.

In a long analysis piece, Craig Walendziak on Thursday explored whether Apple is a Warren Buffett stock. He looked at Apple's market position, its earnings, fundamentals, and management.

To the question of whether the investor understands how the company works, Walendziak reminds us that Buffett famously has refused to invest in technology companies.

In 1998, at the peak of the technology boom, Warren Buffett shocked the Berkshire Hathaway investors meeting by stating that he would not be investing in technology stocks. When pressed on why, he stated he simply didn’t understand them. Buffett saw nothing wrong with taking a pass on companies he could not accurately value. In fact, when pressed on the matter Buffett responded with this gem of a quote: "If I taught a class, on my final exam I would take an Internet company and ask (my students), 'How much is this company worth?'" the Associated Press quoted Buffett as stating. "Anyone who would answer I would flunk."

I’ve heard many arguments that Buffett wouldn’t invest in Apple because it is a technology company. I think this is hogwash. Apple has transformed itself into a consumer staple. They make fantastic and innovative products and sell them to eagerly waiting customers. Its business model is simple and straight forward. Instead of making cola, they make computers.

I buy much but not all of Walendziak's reasoning. Yes, Apple is a technology company, and it makes computing device. But it's a company with great differences and its business model isn't so straightforward.

If Apple were a traditional tech company, it would be running with the pack making the usual tech products, like Dell and Hewlett-Packard and the rest. It would be one of the long list of companies that make "technology" for customers.

Instead, Apple delivers technological solutions that closely integrate hardware, systemware, application platforms, services and a support organization. Oh, and a good bit of innovation, something that is missing from the offerings of many of its competition. These are big differences.

When Walendziak compares cola to computers, he's looking at the PC market. As I mentioned in a recent post, there's a false underlying assumption in much of technology analysis: All computing devices are alike.

For example, I recently read an article about the iPad where Apple's new dual-core A5 processor was compared in the same breath with the Nvidia Tegra 2 processor used in the Xoom, or with the Qualcomm Snapdragon processor. To the author, all dual-core processors are alike. Come on!

So, a Macintosh isn't a Wintel PC. They are not the same thing, even if you can boot up Windows on a Mac. Ask any Mac user if they want to run Windows 24/7 and they will tell you "no!"

Meanwhile, Walendziak says Apple is undervalued.

At 18.7% Apple’s ROE and SGR are both well above average. These numbers are good, but could be better. The lofty balance sheet and high BVPS lower these metrics considerably. Apple's P/E of 19.7 is considerably lower than its 39.5 7 year average. Normally this would be a sign of a stock's momentum slowing down, but with Apple this is not the case. Its five-year forward P/E Ratio is .76. For the second largest company in America this number is simply amazing. Its cash adjusted trailing P/E is barely 16. It baffles me when people call Apple expensive.

Walendziak provides many charts and visual aids. It's fun reading, check it out.

At the end, he admits that it's all a thought exercise.

Obviously, this article is a bit tongue in cheek. Buffett is not buying Apple and I don’t foresee him initiating a huge position anytime soon.

Still, it could happen, right?

Topics: Processors, Apple, Hardware

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53 comments
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  • Nah

    Apple is one Buffet would not touch. He cannot understand it? Let's face it people who are in tech land have trouble understanding it or they would be copying it and being successful at it. Tech companies like Apple, they are things of the moment, IMHO. Apple has been able to deliver, but a couple big misfires and their stock can be cut in half. It's not a "staple" like steel, electricity, washing machines or cola, you know things that have universal acceptance and ongoing reliable demand.
    oncall
    • I would argue your reasoning

      @oncall: First off, when asked about technology companies in general, Buffet said, <i>"I simply don't understand them."</i> Not Apple, but all technology companies. In fact, if you look at Apple's CEOs historically, the only one who has ever done Apple any good is Steve Jobs, while other, classically-trained executives nearly bankrupted the company. You look at Bill Gates vs Steve Ballmer at Microsoft and you see the same kind of issue. IBM? HP? Even Dell operates differently, though those three tend to work in more traditional ways--and all show very little growth in value or profits compared to Apple. It's no wonder Warren Buffet doesn't understand technology companies.

      Meanwhile, Steve Jobs and Apple have been declared Most Respected CEO and Most Respected Company several times over the last ten years while Apple's value and stock has risen some 1600% in just 13 years. Apple has had misfires in the past, but their biggest misfire was in trying to operate like a conventional manufacturer.

      Computers are a staple, today, and Apple is proving that a quality product is just as important in computing as it is in in any other 'staple' business. In fact, if you ask me, Apple is demonstrating that a return to the manufacturing concepts of a hundred years ago, when "the customer is always right" still works today. Times have changed, yes, but giving the customer what he pays for is paying off for Apple.
      Vulpinemac
      • In a nutshell, Apple is giving consumers what they want.

        @vulpine@...

        Apple figured out that consumers don't want hassle. They don't want to babysit technology. They want technology that works for them, not the other way around. The rest of the industry hasn't figured it out yet. The other guys are still making technology for a 1990's consumer. They are trying to hock the technology that they want to sell, not what the consumers want to buy.

        There was a time that they were able to get away with selling overly complex and tedius technology. In fact, some wanted technology that was overly complex. They thought that complexity meant more power and was worth more. That was then, this is now.

        And one of the things that kills me is that the Trolls still claim Apple is too expensive... Um.. Hey losers... Who is beating iPad on price??? Oh Wait... You mean Apple has the best price and they are offering the best technology and the best experience on the market (at the best price on the market)??? Gee... I guess Apple is too expensive.
        i8thecat
      • Computers are staples for enterprise

        @vulpine@...

        Staple="a necessary commodity for which demand is constant" that doesn't describe what Apple makes most of its money from. Apple sells high end, high tech LUXURY items for which demand is totally variable.

        Computers for consumers are not staples like a washing machine is a staple. iPads are not, iPods are not. Staples have predictable need and replacement interval. If push came to shove the first thing most people would stop buying is high tech items like iPads. Companies who sell staples to not have the media go into a frenzy every time the CEO sneezes because Coca Cola will still be selling more Coca Cola next year no matter who is at the helm. Nobody knows what Apple will be worth one year from now because nobody knows how many of the above items they will sell or even what the next models will look like.
        oncall
      • RE: Is Apple undervalued?

        @vulpine@...
        You guys can't take company accolades as a proof to invest in a company. Its like the academy awards. They vote who is the best actor because they want to market the actor for the next 5 years.

        Look at the number of "next real big important high tech company" that were declared during the dot com days. Where is exodous or digital island now? They were billion dollar companies with a list of big big name customers who depended on their service. But still gone.

        If you sit and think about apple's product. As popular as they are, practically over night they can be replaced. Apple is basically Sony of the 1980s. Everybody had a sony walkman, sony tv, sony anything with a battery attach to it. Where is sony these days? But when people are passionate about their companies they don't invest intelligently. Lots of company sell smart products that consumers like. That doesn't always translate to great share prices and in fact it often doesn't. Look at DELL. For years their shares went through the roof with 75% profit increase quarter after quarter (sound familiar?). Then they started coming in with 40-50% profit increases and their shares got killed for like 4 straight quarters. Why do you think several months ago apple released a statement saying they won't be able to produce 75% profit increases continuously. They're trying to avoid the same trap that DELL and so many other high flyers were caught in. But passionate investors never think of these things. Thats why the dot com bust happened. Over exuberance when it comes to gadgets and technology. Look at all the MS vs Google vs Apple chatter. You don't hear about Exxon vs BP vs Chevron.

        You can't argue with warren buffett because his track record is phenomenal.
        rengek
      • RE: Is Apple undervalued?

        @vulpine@... I disagree, While apples marketing team is absolutely AMAZING, their products are NOT that fantastic, sure the ipod was cool, but not the first MP3 player, they just marketed it well, The iphone was cool (mine was a hunk of junk however, and I have since moved to the android platform) but not the first smart phone that could play music, it was just marketed well. The ipad some folks think is cool, but not the first touch screen tablet, its just marketed well.

        I dont think apple gives consumers what they want because the iphone didnt do half of what I knew it was capable of, or what I wanted it to do, but I bought into the marketing, they convinced me that it was the end all be all, they made me think thats what I wanted, until i got it and realized what a mistake I had made. I also disagree with the best technology comment, when the iphone 4 came out, the evo had already been released, the evo has a faster processor, better camera, a flash on that camera, expandable memory, its heads and tails better than the iphone on the hardware side, and we can argue all day about iOS and android..
        and 1200 bucks for a laptop that does the no more than a 500 dollar laptop with linux on it, IS too expensive in my mind...

        I do agree with oncall, if the economy take a dive again, the first thing people are going to quit buying is going to be ipads, and ipods, and if they do need a new computer, they are going to be more apt to look at the cheaper windows laptops rather than the Mac's, (in fact a buddy of mine whose GF is a apple fan wants a new laptop and he cant justify spending 1200 bucks on a macbook, when for 700 bucks less he can get a less expensive windows laptop, and he's been using the mac for a few years) apple is and will continue to be a niche market provider, and thats NOT a bad thing, there will be people who will only buy apple products, but until apple gets a strong hold in the enterprise market, they will continue to only serve those niche markets, graphics, desktop publishing(to an extent, even those are starting to move to windows).... I agree with Warren Buffet on this, I wouldnt invest in apple... unless it was for short term...
        nickdangerthirdi@...
      • RE: Is Apple undervalued?

        i8thecat,<br>There is a trade-off between usability and flexibility. Apple leans towards usability, and sacrifice flexibility. From a corporate standpoint, Apple hasn't made alot of penetration on the desktop because most companies don't want vendor lock-in at the software and hardware level.<br>Apple's PC's still sell at a premium when compared to commodity hardware, although I will admit that the gap has narrowed greatly in recent years. The value prop for iPhone and iPad are competitive with anything else. There is still flexibility issues with both of those products. You can't upgrade memory and you can't change out a battery without voiding your warranty. Those are restrictions I imagine an IT department are going to want to avoid.
        bmonsterman
      • @oncall...

        @oncall: History seems to be proving you wrong across the board.
        <i>"If push came to shove the first thing most people would stop buying is high tech items like iPads."</i>
        The problem with this statement is the demonstrated fact that <i>during this recent recession</i> when nearly every other product brand saw some reduction in sales, Apple maintained double-digit growth in every product except the iPod, which has plateaued and now sells at a kind of 'break even' point of replacing aging products.

        <i>"... Coca Cola will still be selling more Coca Cola next year no matter who is at the helm."</i>
        But will Coca Cola be selling more product than last year? Remember, Apple Computer's first CEO was a former Pepsi CEO--it didn't help them.

        <i>"Nobody knows what Apple will be worth one year from now because nobody knows how many of the above items they will sell or even what the next models will look like."</i>
        But nearly every financial analyst estimates that Apple will be worth even more next year than this <i>because Apple's user base keeps growing faster than any other technology company's.</i> Just as automakers try to conceal their next year's model of any car, Apple conceals their next products until an official announcement. The policy has worked for Apple ever since Steve Jobs returned to the company and I expect Apple will continue this policy even after Jobs has left. Look what's happened to the reputations of the companies that announced they <i>were working on</i> a similar product to the iPad even after its release. Where is Microsoft's Courier? Where is the HP/Microsoft Windows 7 tablet? Where are the dozens of products intended to be 'iPad killers' that so many companies announced last year? Yes, competition is starting to trickle out, but look at how many of those products were no-shows last year and how few are currently available even now?

        Giving the consumer what they want is important; making it something they are willing to pay more for is incredible. Making them willing to pay more when money is tight? You've got a "staple product."
        Vulpinemac
      • RE: Is Apple undervalued?

        @vulpine@...
        oncall
      • We'll See

        @vulpine@...

        I think you guys are making a common error we see after every company has a great stock run. It's almost a mania, watching everyone try to explain why there must be "good solid earth" beneath a companies meteoric rise and that it cannot be a good quantity of hot air helping it out. It's assuming that the company is playing by some new game and that growth is infinite because the fundamentals behind other similar companies no longer apply. Like people here, it "must be a staple" because we cannot just admit that it might not be a staple or that it's really just very popular at the moment like so many tech stocks that have come before.
        oncall
      • ZDNET editing gotta love it

        @vulpine@...

        ZDNET has the worth editing, embarrassing for a tech site. But to continue, I don't want to put down what Apple has accomplished but the iPad and iPhone are what Apple is riding on right now and neither of those has been around long enough to qualify as a staple. Popularity does not equal staple.
        oncall
      • How long does a stock run have to be...

        @oncall: ... to be considered 'having a solid base'? Apple's stock has been rising almost non-stop since 1997, dipping only once when the rest of the market effectively crashed some years back and climbing out of that hole faster than any other company. I'm sorry, but if 14 years isn't a long enough run for you, then you're missing out on a lot of news. The iPad and the iPhone are not Apple's only movers, as their computers, too, are out-growing every other brand by a minimum of 10% and most by very nearly 25%. Some of those other brands may be selling more overall units, than Apple, but their sales are relatively flat compared to last year. At this rate, Apple could become the top-selling brand within a couple years, even though the Windows environment over all will still be dominant. After all, only Apple sells Macs, everyone else sells machines that use either Windows or Linux.
        Vulpinemac
    • Oh....

      @oncall So you're saying "staples", like perhaps investing in automobile manufacturers in the U.S., constitutes a far less risky proposition? :)

      Actually, I think Buffet is right. It's foolish to invest much in things you don't understand. That's a good basic rule of thumb to consider with any business investment. If he's not interested in keeping up with tech-related things, then HE shouldn't really be investing in those areas. That doesn't mean nobody else should.

      As someone who DOES have an I.T. background, I feel like I have more of a "pulse" on what's happening in the tech. sector than most other areas. In my opinion, the #1 risk of buying Apple stock today is the big question-mark about their ability to keep producing market-leading new products if Steve Jobs is taken out of the picture. The whole time Apple has been under his leadership, their stock has done nothing but increase over time. I know many long-time Mac users who have purchased every single Apple product they own using profits made from Apple stocks they hold.

      Without Jobs, sure -- they have competent people who can run the company. But they run the risk of becoming "dull" -- more like HP or Dell. Unlike most CEO's, Jobs was willing to regularly go up on stage and put on an hour+ long show/speech that people really enjoy listening to. It's clear the man really LIKES the things he sells, and he's able to pass that excitement on to the crowd.
      kingtj
      • Read my post again

        @kingtj

        I am not saying no one should invest in Apple, what a ridiculous conclusion to make. Please don't put words in my mouth. I am saying Buffet won't because he cannot understand it. Buffet buys solid, understandable companies that are "undervalued" and he can tell they are undervalued because he can actually calculate a value for the company. You cannot put a value on "excitement" or on products that do not yet exist but Apple must deliver if it is to remain popular. You hit the nail on the head with Jobs. Nobody knows the hit Apple will take when Jobs leaves, NOBODY. Most normal companies do not have a huge unknown like that hanging over their heads. Stocks that are riding a huge wave of popularity can sink over night. People who buy Apple now are making a quite a gamble that Apple will continue to hit them out of the park. And yes investing is largely gambling but good investors like Buffet prefer to be able to put some odds on their bets.
        oncall
    • RE: Is Apple undervalued?

      @oncall I agree with your line of thinking.. You make some excellent points.
      <a href="http://www.lumpsumprofitsguide.com/ryan-moran">Ryan Moran</a>
      krtinberg
      • RE: Is Apple undervalued?

        @krtinberg: You cannot put a value on "excitement" or on products that do not yet exist but <strong><a ref="http://www.maxpapa.com/">search engine optimization perth</a></strong> must deliver if it is to remain popular.
        map01
    • RE: Is Apple undervalued?

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    • RE: Is Apple undervalued?

      @oncall
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      epark732
  • What Apple has is a closed market...

    Anything that goes into an iPhone or iPad: music, video, apps goes through Apple (30% cut). Therein lies Apple's strength. But UNDERvalued? I think Apple could be in a bubble. I don't really think it is that ubiquitous, and I think that it will face more and more competition - the iPad maybe not from the first wave of Android, WebOs, Blackberry, but from the next.
    Roque Mocan
    • RE: Is Apple undervalued?

      @Roque Mocan:
      Not true with regard to music. I get most of my iTunes music either by ripping CDs that I buy or from Amazon downloads. Both work just fine with iTunes.
      mjcohen@...