Apple Inc. (AAPL), Baidu.com, Inc. (ADR) (BIDU), And A Duo Of Investment Ideas For Value Investors

Apple Inc. (NASDAQ:AAPL)The goal in value investing is to buy a stock when it trades at a significant discount to fair value in order to hold it until price finally catches up to its the intrinsic worth of the underlying business. Here are two investment ideas that have surfaced in the tech sector that could make great value investments.

Apple Inc. (NASDAQ:AAPL) It’s no secret that Apple Inc. (NASDAQ:AAPL) is a cheap stock. But a discounted cash flow valuation helps add a bit of perspective on exactly how cheap Apple really is.

In a discounted cash flow valuation, you simply discount future cash flows by the required rate of return that would convince you to invest in stocks to find the present value of these cash flows. I’ve used a discount rate of 10%, which is typical. Next, I estimated that Apple Inc. (NASDAQ:AAPL)’s annual free cash flow will stay at today’s levels. To be conservative, I didn’t add any asset value, like excess cash, to intrinsic value.

The result? Apple’s shares are worth $468 per share. In other words, at $417 the stock trades 11% below its fair value.

An 11% margin of safety, of course, isn’t significant enough to convince a value investor to jump in. However, I was extremely conservative in my assumptions. Consider some of these facts:

Apple Inc. (NASDAQ:AAPL)’s share repurchase program will effectively reduce outstanding shares by about 15%.

Apple’s cash hoard of $144.7 billion is no joke, and it should be considered in any valuation.

It’s easy to say Apple is doomed, but analysts don’t think so. The 46 analysts covering Apple Inc. (NASDAQ:AAPL) on Yahoo! Finance, on average, project EPS to increase 20.88% per annum over the next five years.

What happens to the valuation if we adjust our growth assumptions a bit higher? Estimating 3% annual growth in free cash flow for the next 10 years, and no growth beyond that, the fair value of Apple shares is $574.84. With this estimate, shares today trade at a 27% margin of safety.

If Apple Inc. (NASDAQ:AAPL)’s not undervalued, the company is at least reasonably priced.

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) Watching Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s operating margin contract by 1,200 basis points year over year to 37% when the company reported earnings last week wasn’t fun. Even worse, a 37% operating margin is 1,500 basis points below the company’s peak operating margin in 2011. But does this mean Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s growth story is over? Far from it.

The company boasts an impressive 70% of all paid search dollars in China, positioning itself to receive the bulk of benefits from growth in digital advertising in China over the coming years. Of the 17 analysts covering Baidu.com, Inc. (ADR) (NASDAQ:BIDU) on Yahoo! Finance, the average estimate for per annum EPS growth over the next five years is 25.78%.

But I’ll be far more conservative, estimating free cash flow to grow by 15% in year one and then decelerate each year thereafter for the next ten years:

Year Growth Rate
1 15%
2 14.6%
3 14.1%
4 13.7%
5 13.3%
6 12.9%
7 12.5%
8 12.1%
9 11.8%
10 11.4%

Using a 10% discount rate and a 3% perpetuity rate for years beyond the 10th year, the fair value of shares with these assumptions is $110.50, meaning shares are trading at a 23% discount to fair value. Keep in mind that my estimates are far more conservative than the projections made by analysts covering the stock.

If not an outright buy, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is definitely stock to add to your watchlist.

What do you think about these investment ideas? Have they reached value territory?

The article 2 Investment Ideas for Value Investors originally appeared on Fool.com and is written by Daniel Sparks.

Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple and Baidu. The Motley Fool owns shares of Apple and Baidu.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!