Is Apple Inc. (AAPL)’s Price Action Really ‘Insane’?

Apple Inc. (NASDAQ:AAPL)Apple Inc. (NASDAQ:AAPL) is the most widely discussed stock on the web today, and whether investors like it or not, it will be subjected to a wide amount of speculation, analysis, and any other form of chatter under the sun. We’ve warned you to be wary of rumors disguising themselves as “reports,” such as talk that Apple will shift to a six-month product cycle. Today, shares of the tech giant have risen over seven percentage points, and currently rest over the $560 mark for the first time since November 7th, amid news that notable Apple analyst Brian White of Topeka Capital Markets has called the company’s selloff “insanely insane” in a note to investors.

As originally reported by Fortune, White had this to say about Apple Inc. (NASDAQ:AAPL):

Apple is now trading at just 7.6x (ex-cash) or a straight P/E of 9.8x our CY13 EPS projection and below the S&P 500 Index at 12.5x. Apple’s discount to the S&P 500 becomes even more of a “head scratcher” when you compare growth rates. For example, between CY03 through CY11, Apple has grown EPS by 92% per year versus just 7% growth for the S&P 500 Index. [...] While we don’t expect Apple to grow EPS by 92% per annum over the next five years, we believe 20-30% growth is reasonable based on the Company’s low market share in mobile phones and PCs, combined with growth opportunities in tablets and new potential areas such as Apple TV.

Now, this bullish sentiment can obviously be expected of someone who holds a $1,111 price target on the stock, but it’s our opinion that Apple Inc (NASDAQ:AAPL)’s true potential lies in its talks with Chinese telecom China Mobile Ltd. (NYSE:CHL), which has close to 700 million subscribers, or 70% of China’s total phone-equipped population. Up until this point, the iPhone has only been available to subscribers at China Unicom Limited (NYSE:CHU) and China Telecom Corporation Limited (NYSE:CHA), which do not use the SCDMA network format that China Mobile employs.

Apple has historically tailored its smartphones to WCDMA networks, and it remains to be seen exactly which side will break first. As we originally reported a couple of months ago, “a deal with China Mobile [is] ripe for the picking. One potential hiccup over such an agreement, however, is the carrier’s refusal to play by the so-called Steve Jobs Rules,” which essentially maintain that partners have historically not received a cut of Apple Inc. (NASDAQ:AAPL)’s sales. Rumors have been flying that China Mobile wants a piece of the iTunes action, which may be the main negotiating point between both sides.

Obviously, Apple is undervalued, but it seems clear that the stock is in dire need of a bullish catalyst, and there wouldn’t be a better candidate than a China Mobile deal. Apple Inc (NASDAQ:AAPL) releases iTunes 11 with improved Facebook functionality later this month, though it remains to be seen exactly how the newest iteration of the software will affect the company’s bottom line.

Sell-side analysts still expect Apple to grow its earnings by an average of 20.9% a year over the next half-decade, which is above both Google Inc. (NASDAQ:GOOG) (15.7%) and Microsoft Corporation (NASDAQ:MSFT) (9.6%) quite handily. Even more attractive is Apple’s earnings growth valuation, which, at a PEG of 0.57, indicates that a massive revaluation is in store over the long haul. Shares of the company currently trade at a 59% discount in relation to Google and Microsoft when using this metric, and sport a much more attractive trailing P/E (11.9X) than both Google (20.3X) and Microsoft (14.3X).

If Apple Inc (NASDAQ:AAPL) cannot work out a deal with China Mobile in the intermediate term, another event that can boost shares higher is the company’s next quarterly financials. Historically speaking, the first quarter has always been Apple’s best, and with its recent streak of two straight negative surprises, Wall Street isn’t expecting an otherworldly total in Q1 of 2013. On average, EPS estimates sit at $13.54, a 2.4% decline from the same quarter a year earlier.

It’s worth noting that when Apple beat the Street’s last Q1 estimates with earnings of $13.87 a share, consensus was only $10.04. If Apple is able to notch an EPS in the, let’s say $14 range, it would represent the YOY growth and beat that investors would need to push shares higher. It’s worth mentioning that Apple’s latest EPS guidance is $11.75 a share, but we haven’t seen the full effects that new devices like the Fusion Drive, iPad Mini, and iPhone 5 will have in a holiday season just yet, and these estimates can be revised.

To recap: it seems clear that Apple Inc. (NASDAQ:AAPL) is on the cheap, but it needs a bit of a push. When looking at its two biggest competitors, Google and Microsoft, Apple is trading at an unfair discount. A case can be made that investors should stop comparing the company to itself, and instead, look to competitors’ valuations instead. With expected EPS growth that trumps the competition, Apple remains a better place for investors to store capital than any other mega-cap in the tech sector today.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

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!