Apple Inc. (AAPL), And Investment Opportunities for the Next Decade

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Apple Inc. (NASDAQ:AAPL)“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years,” said Warren Buffett. This, of course, is easier said than done. In fact, the advice seems so naive that it’s tempting to dismiss. Maybe that’s why Buffett has also said, “There seems to be some perverse human characteristic that likes to make easy things difficult.”

Accepting his rebuke, let’s indulge ourselves in seemingly irrational long-term thinking with decades — not years — in mind. Finding investments that are likely to last a decade and provide handsome returns would require an investment to meet two criteria: It should be an enduring market leader with excellent economics, and it should be reasonably priced or even undervalued. Here are two stocks that could fit the mold.

Apple Inc. (NASDAQ:AAPL)
Apple Inc. (NASDAQ:AAPL)has a significant lead on competitors in the fast-growing worldwide tablet and smartphone markets in terms of profits. Apple boasts 72% of worldwide handset profits, according to Canaccord Genuity. Based on numbers from IDC, MacDailyNews estimates that Apple Inc. (NASDAQ:AAPL)’s share of worldwide tablet profits could amount to a whopping 85% — and they insist that this is a conservative estimate.

Yes, Apple’s gross margin has sank considerably, down 1,000 basis points to 37.5% compared to 47.4% in Apple’s second quarter from the year-ago quarter. Nevertheless, a 37.5% profit margin for an original equipment manufacturer, or OEM, is very impressive. It takes serious economies of scale and brand power to achieve a feat like this in consumer electronics. How does Apple Inc. (NASDAQ:AAPL) pull this off? Brand power! Consumers are still willing to pay premium dollars for Apple Inc. (NASDAQ:AAPL)’s products. This trend looks enduring given the iPhone’s 90% retention rate.

Apparently, however, the Street has found better investment opportunities elsewhere. Today, the stock trades at a paltry price-to-earnings ratio close to 10, making it one of the cheapest stocks in the S&P 500. This harshly contrasts with the average analyst estimate for 20.7% EPS growth per annum for the next five years. Surprisingly, this estimate is 5% per annum higher than the average estimate for Google Inc (NASDAQ:GOOG) over the next five years. Even so, Google Inc (NASDAQ:GOOG) trades at a significantly higher price-to-earnings ratio of 24.22, Inc. (ADR) (NASDAQ:BIDU), Inc. (ADR) (NASDAQ:BIDU) (aka the “Chinese Google”) boasts a 73% share of search market traffic in China, according to comScore. Compare that to Google’s 66.7% share of the search market in the U.S. Despite the company’s massive success in China, its stock has been hit hard.

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