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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

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!