Apple Inc. (NASDAQ:AAPL) Isn’t As Cheap As Wall Street Claims

1. None of these analysts take into account a major change in consumer’s preferences towards Apple products. Thirty years ago Sony was the Apple of the day. Ten years ago Nokia was introducing the coolest phones. It is inevitable that consumers will notice that Apple’s products aren’t as superior as they once were and they will stop paying the huge premiums Apple is charging right now.

2. Apple Inc. (NASDAQ:AAPL)’s gross profit margin will probably shrink this quarter. That’s what the company said in October. Introduction of a high cost iPhone and lower margin iPad mini is the reason behind this. Apple needs to keep doing this to increase its sales. It hopes that the increase in sales will make up for the decline in margins.

3. Apple Inc. (NASDAQ:AAPL) used to be once step ahead of its competitors. Not anymore. iPhone 5 isn’t the clear choice over Samsung Galaxy S III and iPad has several credible alternatives. Steve Jobs’ tenacious pursuit of perfection was the key ingredient of Apple’s success. We will probably find out in a year or two that Apple won’t be able to come up with another game changing product such as Apple TV.

I am certain that Apple Inc. (NASDAQ:AAPL) won’t be able to grow its earnings at a 20% rate over the next 5 years. Wall Street analysts are wrong. However, I still like the stock and have a small position. Google Inc (NASDAA:GOOG), Microsoft (NASDAQ:MSFT), Kimberly-Clark Corporation (NYSE:KMB), and Altria (NYSE:MO) are the four peers I will use in my analysis. Google is a true tech growth stock that is expected to grow its earnings by 14% over the next five years and its 2013 PE ratio is 15. As you may agree this growth estimate is a bit rosy but still more realistic than Apple’s. Microsoft is a better comparable than Google. Wall Street expects the company grow its EPS by 9% annually and the stock’s 2013 PE ratio is 9. Again, this long-term growth estimate is very optimistic.

Now let’s take a look at low growth stocks because these companies are more predictable. Kimberly-Clark grew its earnings by 4.8% over the past 5 years and it will probably perform at a similar level. Yet, Wall Street analysts expect an EPS growth rate of 10% for the next 5 years and the stock’s 2013 PE ratio is 15. Altria is expected to grow its EPS by 7.6% over the next 5 years and its 2013 PE ratio is 13.

It is clear that the market values at stable/low-growth stocks at 13-15 times earnings. Apple Inc. (NASDAQ:AAPL)’s current market valuation implies that Apple will earn $30 per share annually. The markets also tell us that Microsoft and Apple are very similar in terms of expected growth rates, i.e. both stocks will experience significant declines in their earnings. I don’t think this is very likely given the strong growth in smart phone and tablet markets. I am very certain that Apple won’t grow its earnings by 20% annually but I don’t think the company’s earnings will shrink by 30% either. I like the 2% dividend yield, share buybacks, and large cash hoard. I am willing to wait until the market acknowledges this.

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