Apple Inc. (NASDAQ:AAPL) stock is undervalued as the company is moving to a mature one. Is the Market missing something here?
– Why is Apple stock trading at such low multiples compared to its tech peers?
– Is there something the market is not seeing?
– What are the industry trends that showcase Apple’s upside despite a poor 2016?
Apple Inc. (NASDAQ:AAPL) is the largest company in terms of market capitalization, but AAPL stock is also the cheapest among the top technology stocks in terms of price multiples. After dropping sharply during the first half of the year Apple recovered nicely during the second half, thanks to the iPhone 7 launch and a favorable response from the industry. But despite the recovery, Apple is still trading at less than 15 times earnings and 3 times sales.
Why is this, and does it present an upside to investors looking to increase their positions?
Of the top four tech companies in the world (by market cap), Apple sells the most, earns the most and has the highest operating margins of them all, yet still trades extremely close to Amazon.com, Inc. (NASDAQ:AMZN), the retail giant that operates with wafer thin margins, in terms of price to sales ratio. Even from a price to earnings multiple point of view, Apple commands a much lower valuation than Alphabet Inc (NASDAQ:GOOG). What is really surprising is that the company is selling at half the P/S of Microsoft Corporation (NASDAQ:MSFT), a company that is still on a recovery path. (See also: Apple Inc. Cuts iPhone Production, Time To Sell AAPL Stock?).
The root cause for such low valuation for AAPL are the growth expectations the market has assigned to all these other companies. Alphabet’s revenues are still growing at double-digit rates and the company’s closest competitor in the advertising industry is many times smaller than them. Microsoft’s cloud business is also growing at double-digit rates for the last two years, and will soon overtake earnings from Windows-based business streams. Amazon’s top line is still growing at double-digit speeds despite the company crossing over into the 100-billion-dollar revenue territory. Apple, in comparison, saw its revenue decline by 8% this year, and the forecasts aren’t really promising.
Let’s take a closer look at Apple’s revenue streams to understand if Apple really warrants such low valuation multiples from the market.
Apple’s lead earner is the smartphone segment, obviously, with iPhone sales accounting for nearly 63% of their overall revenue in 2016. Apple sold 211 million iPhones in 2016, 8% lower than the 231 million iPhones the company sold in 2015. As a result, net sales from iPhone dropped from $155.04 billion in 2015 to $136.7 billion in 2016.
Sales from iPad, iMac and Services were all in the $20 to $24 billion range, much smaller in size when compared with iPhone sales. The problem for Apple is that sales of all their devices sharply declined this year, and ‘services’ was the only segment that reported strong growth.
But Apple is not the only company to face a sharp decline in smartphone sales this year, as it is a worldwide phenomenon. The days of strong double-digit growth are essentially over for the smartphone industry. According to Comscore, there were 198.5 million smartphone users in the United States, while PewResearch center says “64% of American adults now own a smartphone of some kind, up from 35% in the spring of 2011.”
That leaves about a third of the population yet to bite the smartphone bullet, of which 42.6 million are senior citizens – 14.5% of the population – who aren’t likely to keep refreshing their smartphones frequently even if they do use one.
As developed markets move out of the growth equation, companies will naturally turn their focus towards developing nations. But even that is not going to help Apple much.