Apple Inc. (NASDAQ:AAPL) at a recent price of $453.26 is up 17.7% from its 52-week low, hit less than a month ago. At a recent $21.27, Cisco Systems, Inc. (NASDAQ:CSCO) has risen 42.8% from its 52-week low established last July. Microsoft Corporation (NASDAQ:MSFT) has gained 26.4% from its low of $26.26, established in December of last year and Intel Corporation (NASDAQ:INTC) has jumped 24.2% off of the $19.23 low it reached last November. Our first impression might be that these stocks are now overvalued; but, first impressions are often wrong.
Gains can be misleading
Even though these are very impressive gains for those who bought at the bottoms over the last several months, the values that were being placed on these icons of technology at those bottoms were ridiculously low based on any sound fundamental analysis of the businesses. When a business is on sale at a 30% to 50% discount to its real fair value, the share price can rise 50% to 100% and merely return the valuation to a reasonable level. I believe that is the situation that confronts us today with the current prices of these technology giants.
From the darling of tech to pariah
It is a long drop in perception to go from having Forbes contributor Eric Jackson predict a share price of up to $1,650 by the end of 2015 to having DoubleLine CEO Jeff Gundlach refer to it as a “broken company” in a Jan. 13 appearance on CNBC, but that is exactly what happened for Apple Inc. (NASDAQ:AAPL) over the past year. This is exactly the kind of setup where I seek opportunity.
On April 23, Apple Inc. (NASDAQ:AAPL) CEO Tim Cook commented that the company had some “exciting new product categories” that they anticipate will be available this fall. This should help firm the share price through the summer and cause it to rise when these new products begin to be released into the market. New products are nice, but I think what many investors are overlooking are the values of Apple Inc. (NASDAQ:AAPL)’s iTunes brand and its App Store, where, by the time you read this, they will probably have surpassed 50 billion application downloads. The ongoing revenue stream from these businesses and the way they lock in their customer base is phenomenal. Since its launch in 2008, the App Store has delivered $3.86 billion in revenue to Apple and iTunes produced $2.4 billion in just the last quarter alone. I don’t believe these are the numbers of a broken business. If Apple Inc. (NASDAQ:AAPL) shares were to trade at only a 1-time multiple of its five-year projected earnings growth rate of 15%, the share price would rise to $600, based on the current consensus.
Best of all, none of the previous analysis includes benefits to shareholders of the recently announced plans to distribute approximately $100 billion of Apple’s $135 billion cash hoard through dividends and share repurchases.
We can’t survive without our hearts
When it comes to pumping information over private networks or the Internet, Cisco Systems, Inc. (NASDAQ:CSCO) is the heart, as it provides the equipment that makes that data flow. If you believe we cannot thrive and survive without the coordinated flow of electronic data and information around the world, then you must believe in Cisco.
As of January 2013, Cisco Systems, Inc. (NASDAQ:CSCO) was holding nearly $46.4 billion ($8.70/share) in cash and short-term investments on its balance sheet. I believe Cisco will follow the lead of the other tech giants and soon announce plans to return a significant portion of this money to shareholders. Over the past five years Cisco has begun rewarding shareholders more effectively by reducing the outstanding share count by 10% and paying out $2.16 billion in dividends to shareholders.