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Apple Inc. (AAPL): How Cheap is the World’s Largest Tech Company?

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How cheap is Apple Inc. (NASDAQ:AAPL)? Is it going to rise? And if so, when? These are all good questions, but perhaps the best is, “how does it compare to other tech giants,” more specifically, Microsoft Corporation (NASDAQ:MSFT)?

Apple Inc. (NASDAQ: AAPL)

By now, everyone knows that Apple Inc. (NASDAQ:AAPL) has lost 35% of its value in six months and that it trades remarkably cheap compared to fundamentals. I say, “remarkably cheap” because although investors disagree on their outlook, I have heard very few say that it is expensive. To better explain, and to put this into perspective, I am comparing Apple to another tech giant, Microsoft Corporation (NASDAQ:MSFT), using some of the more common metrics of valuation so that you may see just why it is so cheap.

It’s not really fair to compare cash flow such as accounts receivable, inventories, expenditures, or cash positions and some of the more telling fundamental metrics for two companies that are so different in size. Instead, it is wise to look at what I call the “homepage metrics,” those that are psychologically most important to the market, and are most widely watched by all investors to get an idea of how a company might stack up against another.

Apple Microsoft
1. Trailing P/E 9.59 11.04*
2. Forward P/E 8.53 9.17
3. PEG Ratio 0.51 1.11
4. Price/Sales 2.44 3.28
5. Operating Margin 33.46% 35.43%
6. Return on Equity 38.41% 22.62%
7. Revenue Growth 17.70% 2.70%
8. Expected 2013 Growth 15%-20% 2%-4%

*minus $6.3 billion in unusual operating expenses

1. The “P/E Ratio” is perhaps the most discussed metric among retail investors, a metric that often attracts investors to a stock. Obviously, Apple wins by a large margin, however Microsoft Corporation (NASDAQ:MSFT) did have a number of unusual expenses over the last 12 months.

2. The forward P/E ratio is more important than the P/E ratio because it takes into account the stock’s current price versus the next year’s expected earnings. This is important because a stock’s price is based on expectations. In comparison, Microsoft and Apple are close, but Microsoft is 8% more expensive than Apple.

3. The PEG ratio takes into account earnings growth and valuation, with a “1.00” considered “fair value.” In a sense, Microsoft is 120% more expensive compared to Apple Inc. (NASDAQ:AAPL) in terms of growth/valuation.

4. Microsoft is 35% more expensive than Apple Inc. (NASDAQ:AAPL) in its price/sales. This premium implies that Microsoft has the better growth, as faster growing companies trade at higher multiples to fundamentals.

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