Now that Apple Inc (NASDAQ:AAPL) have stumbled back to the low $600 region, investors should be asking themselves whether now is a good entry point for the famous maker of the iPad, iPhone, and MacBook. Apple Inc (NASDAQ:AAPL) shares are trading at only 11.7 times forward consensus estimates, and big-time billionaire hedge fund managers like David Einhorn are seemingly in love with the stock (see Einhorn’s holdings here). The overarching investment idea is simple: AAPL makes blockbuster mobile and tablet devices in a time when worldwide PC sales dwindle. And indeed, according to IDC analyst David Daoud, PC sales dropped 8.6 percent year-over-year in the third quarter 2012.
We have recommended the stock at 12.5 times its forward earnings as a conservative investment, but there has been a fair amount of headwind lately for Apple’s valuation. Analysts have, by and large, overestimated the earnings potential for a number of companies, perhaps including Apple Inc (NASDAQ:AAPL). A Barron’s article published over the weekend about the post-PC condition called the earnings slips reported by Microsoft Corporation (NASDAQ:MSFT) and the chip makers Advanced Micro Devices, Inc. (NYSE:AMD) and Intel Corporation (NASDAQ:INTC) “spooky.”
Microsoft is, for instance, priced at about 9 times forward earnings, which might put it in the bargain bin. Since analyst earnings estimates might be off base, a look at revenue in the price/sales ratio can give us a better valuation idea. When we compare the revenues of Apple Inc (NASDAQ:AAPL) and Microsoft, we see that AAPL is more expensive in respect to how much revenue the company generates; Microsoft has a price/sales ratio of 3.3, while Apple’s is 3.8. But investors are not running to Microsoft. Why?
Apple still might be the best bet for the long-term trend away from PCs and towards mobile devices and “on-demand” cloud computing. Despite the release of the iPad mini—Apple’s response to the $100 to $200 eBook reader segment—many investors are starting to search for some reasons to enter into Apple Inc (NASDAQ:AAPL) shares besides their apparently cheap price. Henry Blodget of Yahoo Finance was able to name perhaps a very important potential catalyst: the release of Windows 8. This new OS from Microsoft will integrate many of the aspects of the tablet form factor directly on PCs, allowing it to be a cross-platform solution. Blodget claims that using Windows 8 is a “confusing experience” even for “die-hard Windows fans.” Some of the features that made Windows attractive for the enterprise segment, including the straightforward and classic Start-button interface, are being eliminated and, in other cases, altered. This could lead to something of an accidental penetration of Apple Inc (NASDAQ:AAPL) into the enterprise segment—a segment increasingly committed to a “bring your own device” approach.
Amazon.com, Inc. (NASDAQ:AMZN) is a rather direct way to play the post-PC environment, and it is also popular with a number of hedge fund managers. The company does not produce any PCs and, on top of that, seems to dominate every retail market that it enters. Its cross-platform Kindle interface is in no way contingent on PCs, even though it runs just fine on them. Its shares are also retreating at the moment, down about 10 percent over the past month. The issue with Amazon is that it is not a clear bargain in the way that Apple Inc (NASDAQ:AAPL) might be. Amazon trades at 2 times sales (lower than Microsoft and Apple) but trades at more than 90 times forward earnings. At that, Amazon is only apparently cheaper according to price/sales because it runs a business on volume, not margin—less revenue is converted into earnings. That said, Microsoft’s Surface might turn out to be a flop at its abnormally high price, so Amazon is still worth a look, if at a lower share price.
We think the upcoming corrections stemming from earnings disappointments are an excellent opportunity to get the most out of a post-PC play long-term. Even if Apple’s earnings miss estimates, we think that much of the pessimism is already priced into Apple shares. Apple Inc (NASDAQ:AAPL), in short, combines a promising future with the right price.
Disclosures: Brian Tracz is long AAPL and MSFT.