As each day passes by, the company and the stock of Apple Inc. (NASDAQ:AAPL) get more and more separated from each other. Over the last few months, Apple’s stock price hasn’t reflected the performance of Apple Inc. (NASDAQ:AAPL) as a company, which is one of the most successful companies in the world. As of now, Apple is treated as if it will post no growth for a long, long time. In fact, Apple’s valuation implies that investors see shrinkage in the company’s future.
What if Apple Inc. (NASDAQ:AAPL) traded like these companies I’m listing below from a large variety of industries?
| Company | Price | Trailing P/E Excluding Cash | Forward P/E Excluding Cash |
|---|---|---|---|
| Microsoft (NASDAQ:MSFT) | $29.72 | 12.29 | 11.20 |
| IBM | $209.54 | 14.00 | 11.94 |
| Oracle | $32.97 | 12.10 | 9.82 |
| Qualcomm | $66.02 | 17.47 | 15.31 |
| Netflix | $169.43 | 515.82 | 131.93 |
| Amazon (NASDAQ:AMZN) | $261.42 | – | 172.66 |
| Starbucks | $57.45 | 29.31 | 25.06 |
| McDonald’s | $101.08 | 18.49 | 17.26 |
| General Electric | $23.08 | 11.25 | 9.31 |
| $777.65 | 19.45 | 16.53 | |
| Apple | $427.05 | 7.70 | 6.70 |
We can add many more companies in the above table, but this is sufficient to make the point. Apple Inc. (NASDAQ:AAPL) is greatly undervalued compared to most large companies across industries. If Apple were to trade like Microsoft, it would be worth $713. If Apple were to trade like International Business Machines Corp. (NYSE:IBM), it would be worth $760.93. If Apple traded like Oracle, it would be worth $625.82 or if it was trading like Qualcomm, it would be worth $975.70.
If Apple traded like Google, it would be worth $1,053.46, and if it traded like Amazon, it would be worth $11,003.85. No matter how you cut it, Apple is grossly undervalued.
Take Amazon.com, Inc. (NASDAQ:AMZN) for example. Given its current valuation, investors are betting that Amazon’s profits will double every year for the next 7-8 years. Obviously, this would be a miracle for a company Amazon’s size. In order to accomplish this, Amazon would have to either increase its margins drastically every year, or it would have to generate massive revenue.
The company enjoys a relatively high market share in the U.S., but it may have to gain similar market share in many countries before it justifies its current value. As nearly 90% of Americans do at least some of their shopping online, the U.S. market is reaching a saturation for Amazon.com, Inc. (NASDAQ:AMZN), and the company will have to move to markets like Asia and Eastern Europe for more growth.
The company has razor thin margins, which means that if the revenue falls a little, there is a risk of reporting a loss. No one really seems to know what Amazon’s plan is in order to return better value to investors. The company is expected to grow its revenue by about 20% every year for the next five years, which doesn’t justify its sky high valuation.
I would definitely not say that companies like Microsoft Corporation (NASDAQ:MSFT) or International Business Machines Corp. (NYSE:IBM) are expensive. These are solid companies with proven business models, and they are definitely great investments.
On the other hand, Apple is still cheaper than every one of these companies by a considerable margin. In the last 10 years, Microsoft Corporation (NASDAQ:MSFT) hasn’t done much for investors in terms of providing returns. I’ve been holding the company, collecting dividends, and writing covered calls for the last several years, but the returns are not that great considering that the stock price has been flat for a while.
IBM does a better job of pumping its stock price up as the company keeps repurchasing its shares, which brings the EPS up every quarter even when the actual profits might be flat. As PC sales go down significantly year over year, Microsoft will have to gain a significant amount of market share in the smartphone and tablet market in order to make up for the revenue loss in the PC market. So far, Microsoft hasn’t accomplished this task.
Of these companies, Apple has the healthiest balance sheet and the biggest opportunity for future growth. Furthermore, Apple’s brand name is more valuable than most, if not all of these companies. Moreover, Apple’s lack of debt is very valuable when compared to the high debt levels of some of these companies.
Many people are currently expecting a correction in the market. These people also expect money to flow to gold and bonds if the correction actually materializes. I believe that the money will flow to beaten down stocks like Apple if a correction happens. There is absolutely no reason for Apple to trade for such a low valuation at a time when market is trading near or at all-time high.
If a sell-off starts, it will start with the overvalued stocks towards the undervalued stocks. Apple will play a major defensive role in many people’s portfolios as it is already beaten down badly, and all the bad things that could possibly happen to the company (except for a meteor attack on its headquarters) are already priced in by now.
Apple still generates cash like a bank, it still enjoys tremendous costumer loyalty, and it is still “cool.” Just because investors have punished Apple’s stock doesn’t mean that Apple is performing bad as a company.
Many people think that Apple needs to invent new products out of thin air to stay relevant, but this is not the case. Apple just needs to build products and offer services that are a little better than the competition. Tim Cook is the person to make sure it happens. Besides, Apple still has a lot of tricks it can use to increase its share price, such as hiking up the dividend rate or buying back shares.
In conclusion, Apple is one of the most undervalued companies in the market because it is somewhat decoupled from its stock. Once the fundamentals and technicals get together again, Apple will continue to enjoy the party it enjoyed between 2004 and 2012.
The article What If Apple Traded Like One of These Companies? originally appeared on Fool.com and is written by Jacob Steinberg.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
