With Microsoft Corporation (NASDAQ:MSFT) currently valued at 9.58 times cash flow and Google Inc (NASDAQ:GOOG) carrying a multiple of 17.24, Apple could once again see a share price increase of 50% to 100% just to wind up valued on an equal plane with Microsoft and Google — even though both rivals are projected to grow earnings at a pace equal to or less than Apple Inc. (NASDAQ:AAPL) over the next five years.
With this much free cash flow, Apple could borrow enough money at 10% interest to buy all of its outstanding shares, and still have an additional 5% left over for profit as a private company. Considering Apple can sell bonds for well below 5% interest right now, its current valuation based on cash flow is ridiculous.
Does the management team handle money well?
A seldom asked but critical question when considering any investment opportunity is whether the management team in place is better at producing high returns on capital than the individual investor. Return on equity and return on capital are two excellent measures of the effectiveness with which company management teams allocate the money entrusted to them by investors.
Return on equity is simply a percentage that indicates how much the value of the business owned by investors in increasing on an annual basis. Over the past five years, Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) have provided annualized returns on equity of 41.4%, 18.6%, and 35.7% respectively. These rates of return are nothing short of spectacular for businesses of this size, and they clearly display the expertise of these management teams. They also further indicate that Apple should be priced in line with both Microsoft and Google in regards to other valuation metrics in establishing fair value.
Return on capital is a measure of the percentage return on investment for the capital the company has reinvested into the business. Again, the respective values for return on capital for Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG) and Apple at 36.9%, 17.6%, and 35.7% for the last five years prove the effectiveness of these management teams when it comes to reinvesting in these companies. Once again, the numbers indicate that Apple Inc. (NASDAQ:AAPL) should be valued in line with Microsoft and Google when metrics for determining fair value are applied.
Final thoughts
While all three of these businesses are currently priced at quite attractive levels for dominant global brands, Apple could rise 50% from its current level and still be valued equally with Microsoft and Google Inc (NASDAQ:GOOG). Investors who fail to take this opportunity to buy Apple Inc. (NASDAQ:AAPL) shares at this price will regret it for years to come.
Ken McGaha owns shares of Microsoft Corporation (NASDAQ:MSFT) and Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT).
The article Buy This Tech Giant Before It Rises 50% originally appeared on Fool.com.
Ken is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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