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Buy Apple Inc. (AAPL) Before It Rises 50%

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One thing that is certain when it comes to investing in technology stocks is that what is loved today will soon be hated and share prices of hated businesses will be beaten down to absurdly low valuations. That appears to be the case today with shares of Apple Inc. (NASDAQ:AAPL). One of the great technology brands of our time is selling at a bargain-basement price compared to other tech giants.

A bad Apple or a victim?

Apple Inc. (NASDAQ:AAPL)

Just a year ago, Apple Inc. (NASDAQ:AAPL) was one of the tech darlings of Wall Street. The analysts covering the stock viewed it as a must have for virtually every portfolio, and their predictions for the performance of the stock price were astronomical.

But after missing analysts’ earnings estimates in three of the last four quarters, the company has seen its share price decimated, falling from a high of $705.07 to a recent low of $385.10. As of June 28, 2013, the shares were trading hands at $396.04, representing a decline of 43.8% from the September 2012 high.

What could have transpired so quickly to change such a beloved investment into a pariah? Analysts have changed their short-term view of this business. They now project that current-year earnings will come in about 11% lower year over year. Investors never like to see earnings fall, but does this projected drop justify a 44% decline in the share price?

Apple’s valuation compared to other tech giants

Since different industries carry vastly differing valuations based upon perceived long term prospects, it’s always wise to use companies involved in the same industry when attempting to locate accurate comparisons for establishing fair values.

Going forward, analysts covering Apple Inc. (NASDAQ:AAPL) are projecting earnings to grow at an annual rate of 15% for the next five years. However, the stock currently changes hands at a multiple of only 10 times the projected earnings for the year ended June 30. That gives the stock room to rise 50%, just to end up trading at an earnings multiple equal to its growth rate.

Other tech giants such as Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) trade at price-to-earnings-to-growth rate multiples of 1.34 and 1.46 respectively. Apple would have to double in price from its current PEG ratio of 0.67 to be valued at the same ratio as Microsoft or Google.

Apple could buy itself with free cash flow

Price-to-cash flow is another excellent valuation metric to determine whether any business is expensive or cheap. This ratio is simply a measure of how many years it would take a business to generate enough free cash to buy all of the outstanding shares at the current market price.

With the rapid pace of innovation in the technology sector, price-to-cash flow ratios under 10 provide the most favorable opportunities as the timeframe required to cover the value of the business with free earnings is compressed to the shortest time.

Of these three businesses, Apple Inc. (NASDAQ:AAPL) is, once again, by far the lowest valuation at only 6.8 times cash flow. That’s without discounting its massive cash hoard, estimated at $130 billion.

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