There was a time when bullish notes on Apple Inc. (NASDAQ:AAPL) didn’t seem to catch a break, but after the first-quarter earnings; the entire social media is now littered with all the investors’ pessimism and analysts’ downbeat reviews that one can think of. Despite the potential future earnings power, a solid dividend, and Apple’s ability to innovate, shares are trading near 52 week low. Investors seem to be on an emotional roller-coaster ride, with some suggesting that Apple Inc. (NASDAQ:AAPL) growth story is over, while some proclaim that this discount afforded by the post-earnings sell off is a once in a lifetime opportunity.
Arguments from Apple bears
Doubtlessly, Apple faces a multitude of competitors. Fear is whether Apple has lost its technological edge, and whether Google Inc (NASDAQ:GOOG)’s Android devices and maybe Microsoft Corporation (NASDAQ:MSFT)’s Windows mobile devices will eat into Apple’s growth opportunity. Google’s Android has now captured 70% of the global smartphone market share compare to Apple Inc. (NASDAQ:AAPL) iOS, just under 20%.
Moreover, Microsoft Windows 8 has now entered the smartphone software market; and with a recent collaboration with Nokia Corporation (ADR) (NYSE:NOK), Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 will be able to get improved hardware support and is expected to give strong competition to Apple iOS and Google’s Android. Nokia Corporation (ADR) (NYSE:NOK)itself is under immense pressure as the Finnish firm’s near term goal is to at least survive in the smartphone territory that, at the moment, is dominated by Apple Inc. (NASDAQ:AAPL) and Samsung handsets.
There are also questions about whether China Mobile Ltd. (ADR) (NYSE:CHL) and Apple will agree on an iPhone deal or not. Many analysts have suggested that China Mobile, the world’s largest cellular provider by subscribers, won’t be inking a licensing deal with Apple on the iPhone 5 anytime soon. There’re also fears of the iPad-mini cannibalizing iPad sales, and the future exacerbation of margins from a possibly lower cost iPhone.
Cheap as chips
First, investors need to focus on Apple Inc. (NASDAQ:AAPL) as emotionless as possible. The company has a big market base; millions of people still use iPhones, iPads, and iPods. Fears of market saturation and slowing growth are nothing but over exaggeration — analysts still expect the company’s sales to grow over 15% this year. I believe Apple, like always, will adapt to competition very quickly.
Apple Inc. (NASDAQ:AAPL) currently has almost $150 in cash per share — almost one third of the current price per share. Shares currently trade at 10 times trailing earnings and 6.8 times trailing EBITDA — the lowest since the financial crisis of 2008.
Discounted cash flow valuation
I’m comfortable with a long-term revenue growth outlook of 10% to 15% on Apple. The company currently has a cash flow margin of 30%. Longer term, though, I believe the company can leverage better cash flow from its operations — it can boost that margin into the mid-to-high 30s.
I expect Apple to grow its cash flow at a 10%-12% rate for the long term, which will lead to a steep looking compound cash flow growth rate of over 15%. Discounting that back using a WACC of 10%, it suggests a fair value of about $900; or almost double from the current level. In other words, the stock is priced for more than 30% annualized returns in the next three years if you buy at the current share price, assuming sales and cash flow grow as stated.
Foolish bottom-line
Based on several financial metrics, shares of Apple currently appear quite cheap. Stocks like Apple don’t often give investors a chance to buy at such a substantial discount to a fair value, so this sell off is certainly a tempting opportunity. I think, Apple’s share price will continue to rise over the next few years. All told, I believe Apple shares could double from here.
The article Apple Shares Could Double From Here originally appeared on Fool.com and is written by Nauman Aly.
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