By now, most investors know Apple Inc. (NASDAQ:AAPL)’s recent history: after eclipsing $700 per share and briefly becoming the world’s most valuable company by market capitalization, the stock cratered. Shares have fallen 35% since the highs reached last year. Once the darling of the investing community, Apple Inc. (NASDAQ:AAPL) has now been thrown into the trash. The market has seemingly decided that Apple’s days of innovation and growth are over. Clearly, the company has nowhere else to go but down. However, don’t be fooled: despite the swirling negative sentiment Apple is trading at an extremely low valuation, and at current prices represents a compelling value.
What a Difference a Year Makes
As recently as a few months ago, Apple Inc. (NASDAQ:AAPL) was destined for greatness. Analyst after analyst raised their price targets in a bizarre attempt to one-up each other. Calls for $1,000 per share price targets and even a trillion-dollar market cap were not only possible, but inevitable. Fast forward to today, and everything has changed. The esteemed sell-side analyst community has completely turned on Apple Inc. (NASDAQ:AAPL), presumably because of the company’s ‘disappointing’ quarterly earnings results.
Another technology company in the midst of a run-up is Amazon.com, Inc. (NASDAQ:AMZN). The company reported that fiscal 2012 revenues climbed 27% year over year. However, earnings per share came in at a loss of 9 cents per share compared with a profit of $1.37 from the prior year, although you wouldn’t know it by the reaction of the stock price since the earnings announcement. Shares of Amazon rose 13% since the end of 2012, before retracing a little to its current levels.
Apple Inc. (NASDAQ:AAPL), meanwhile, reported fiscal first-quarter 2013 earnings—and the market was far from pleased. Although the company’s revenues rose more than 17% since the prior year’s first quarter, earnings were relatively flat. Consequently, shares of Apple Inc. (NASDAQ:AAPL) continued their already puzzling decline.
Taking a longer view, fiscal year 2012 was still a fantastic year for Apple on a financial basis. The company’s revenues increased 45% versus 2011. Amazingly, earnings per share have increased at a compound annual growth rate of almost 60% over the last four years.
Multiple Expansion vs. Multiple Contraction
Google and Amazon are currently valued as high-growth technology companies. Apple, on the other hand, is currently priced as a slow-growth utility. Actually, most Apple investors would probably kill for the valuation of a utility nowadays. Whereas many utilities with earnings growth potential in the low single digits trade for trailing price-to-earnings ratios in the high teens, Apple Inc. (NASDAQ:AAPL) is trading at slightly more than 10 times 2012 earnings per diluted share.
Google trades at 24 times fiscal 2012 diluted earnings per share, and Amazon’s P/E can’t even be calculated since it reported a net loss for its most recent fiscal year. Both Google and Amazon are great businesses, and since I don’t have a crystal ball, I can’t say that neither company can continue to grow at rates that justify their valuations. However, it does seem fairly obvious to me that Apple’s valuation is irrational.
I understand that consumer tastes can be fickle, and the popularity of a tech company’s products means everything to its success. With that said, I’m betting that Apple is the same innovative marvel it has been over the last decade. Sure, earnings growth isn’t likely to keep up at its gangbusters pace as a result of Apple’s enormous size. To illustrate that, if you broke each of Apple’s businesses into separate companies, each would rank on the Forbes 100 list.
Furthermore, lower-priced devices will most likely result in margin compression. At the same time, lower-priced items will also result in higher overall sales and customer loyalty from consumers all over the globe who couldn’t previously afford Apple products.
Moreover, at this price it’s pivotal to understand that an investor doesn’t need huge growth to justify the company’s absurdly low valuation. Apple has $137 billion in cash and marketable securities on its balance sheet, amounting to $146 dollars per share. If you back out the cash, Apple is trading at 7 times fiscal 2012 diluted earnings per share. Apple also offers something neither Google nor Amazon does: a dividend. The stock yields 2.3% at recent prices, 30 basis points better than the 10-year Treasury bond. With that kind of cash at the company’s disposal, investors should expect big distributions to shareholders in the form of buybacks and increased dividends for years to come.
Bottom Line: I’m Buying Apple Inc. (NASDAQ:AAPL)
Over the last few weeks, I’ve initiated a position in Apple. My timing was poor in the sense that I bought before the company’s earnings results. However, I considered the subsequent share price decline a gift from the market’s irrationality, so I bought again. If Apple Inc. (NASDAQ:AAPL) continues to fall, I’ll buy even more. Apple is ridiculously cheap, and at current prices represents a screaming buy.
The article Let’s Face it: Apple is Absurdly Cheap originally appeared on Fool.com and is written by Robert Ciura.
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