Apple Inc. (NASDAQ:AAPL) is up to its old tricks, trading significantly lower with the broader market. On Monday, Jefferies’ Peter Misek cut his target from $420 to $405 due to weaker demand during his iPhone channel checks. Regardless of this call, Apple is still trading illogically and is showing similarities to Netflix, Inc. (NASDAQ:NFLX) back in 2011 – thus, I believe that it will eventually become Microsoft Corporation (NASDAQ:MSFT).
The Market’s New Netflix
While Netflix, Inc. (NASDAQ:NFLX) had risen 215% over the last year, it is always beneficial to reminisce of the past, and then learn from those experiences. Looking back, Netflix crashed from $300 to $60 in just over four months. It was the decision to break the company’s services into two separate businesses (streaming & DVD rental) that led to this decline.
The market did not respond well to Netflix, Inc. (NASDAQ:NFLX)’s decision to raise prices, nor has the market responded well to a new look Apple Inc. (NASDAQ:AAPL). The world’s largest tech company has slowly, but surely, transitioned itself from a hyper-growth tech stock to a company with steady growth.
Sure, the company has made some mistakes along the way: including slower than expected product innovations and a sloppy iPhone 5 launch (which led to the decline) – but as with Netflix, Inc. (NASDAQ:NFLX), such overreactions usually end favorably for the stock.
The Second Coming Microsoft
Apple Inc. (NASDAQ:AAPL) is trading at less than seven times earnings (minus cash), and it is highly unlikely that Apple will maintain such a deep discount to the overall market (S&P 500 trades at 15 times earnings). Much like Netflix, Inc. (NASDAQ:NFLX) has eventually recovered as a new but slower growth business, Apple will almost certainly do the same.
Apple still has double digit growth, so if we consider that its growth is twice that of competitor Microsoft Corporation (NASDAQ:MSFT) it should give us a fair idea of valuing the company.
Both Microsoft and Apple Inc. (NASDAQ:AAPL) have similar operating and profit margins, return on equity and assets, and similar dividend yields. Therefore, I am using sales and earnings as the basis of valuation. Microsoft Corporation (NASDAQ:MSFT) is currently trading at 3.65 times sales and 17 times earnings.