By
Andy
Zaky
:
In light of the recent sell-off in global equities, it is now an
incontestable FACT that Apple is the most undervalued and
underappreciated large-cap growth company in America. The stock
trades at an extremely depressed valuation that Wall Street isn't
taking seriously (8.25 Forward P/E Ratio), the company's growth
continues to outpace every large cap company on the entire S&P
500, and the company's growth rate percentage - defying all laws of
gravity - continues to accelerate without any sign of abating.
Every quarter that goes by Apple reports another multi-year
record high growth rate that continues to be brushed aside and
overlooked by investors. Apple's stock performance relative to its
valuation and fundamentals, and relative to other companies with
lower growth rates and more expensive valuations is completely
abysmal.
In its recently reported fiscal Q3 2011, for example, Apple
reported a 6-year record-high growth rate of 121.94%. Yet, one
would never know this by listening to CNBC, Bloomberg or reading
the average article from The Street.com or Business Insider.
Instead, the only stories you will see are ones that don't really
matter in the grand scheme of things.
For example, instead of pointing out how the company reported
122% earnings growth in fiscal Q3 or the fact that the company
trades at a 13 P/E ratio, CNBC is quick to point out how iPod sales
- an operating segment that makes up only 4% of Apple's total
revenue - is slowing. Never mind the fact that iPhone sales grew
over 140% - four times the smartphone market - from 8 million units
to 20 million units in fiscal Q3 or the fact that Apple's revenue
has almost tripled in 2-years.
Stop the presses because iPod sales, which produce less in
revenue than iTunes, is now slowing. And it wouldn't be so bad if
the press merely only reported these inconsequential facts. But
it's not just that. It's the highly misleading and faulty
conclusions drawn from these inconsequential facts that has been so
damaging for the stock over the years. If it isn't the Zune iPod
Killer (
MSFT
), or the Android iPhone Killer (
GOOG
), then it's the Amazon Kindle Fire iPad Killer (
AMZN
) which amounts to nothing less than the obvious end of Apple.
Forget about reporting the actual facts or the news, everything is
now editorialized.
No one cares to report that iPhone sales outpaced the market by
400% or how extraordinary it is for a company of Apple's size to
see accelerated revenue growth of 66% leading to sales of $108
billion in 2011. Or that you would have to go back to 2004 when
Apple was reporting less than $1.00 in EPS to find a year with a
higher EPS growth than the 82.71% Apple recorded in 2011. True
story. See below:
There seems to be an ever-present sentiment-war being waged
against Apple as it is constantly hit from all sides in a very
concerted way. And this is not something new. It's been going on
for years with Apple. With the recent passing of Steve Jobs, it has
only gotten much much worse. I'm here to try and balance the scales
a little by reminding everyone about the simple truth concerning
Apple. While the company's earnings have absolutely skyrocketed
since 2008, to the dismay of investors and to the delight of
Business Insider, the stock has gone nowhere.
In late 2007, Apple traded at $200 a share after reporting $3.93
in EPS on $24.5 billion in revenue. Turn the pages to 2011 and it's
an entirely different company. In just four-years, Apple's earnings
have grown 600% to $27.68, and its revenue skyrocketed 341% to
$108.2 billion. That's the most explosive 4-year growth rate of any
large-cap company on the entire S&P 500.
Yet, one wouldn't know this given the stock's very sluggish
performance, extremely depressed valuation and the media's
permanently negative sentiment on the stock over the past few
years. The stock is now trading at an extremely low 13.1 trailing
P/E ratio. We're talking about a valuation level that Apple hasn't
seen in nearly a decade - this despite the fact that the company
grew its earnings 82% this year which is the highest in over 7
years. We're talking about a valuation that is more than 10% lower
than the lowest point during the financial crisis. See below:
And even though Apple has grown its earnings by 600% in four
years, the stock has only risen 81%. And while 81% might seem like
a lot, just remember that the company is essentially 7x larger than
it was in 2007. Apple has also grown its balance sheet 5-fold since
that time and its cash has also risen 5-fold. You would expect to
see at least a 200-300% move in the stock, and if history repeats
itself, you soon will.
The chart below should give you an idea of how poorly Apple has
performed relative to its growth. On the first day of 2008, Apple
traded at $200.50 a share. It had $3.93 of earnings under its belt
at the time. Today, the company has $27.68 in earnings and only
trades at $363.57 (as of Friday) which is merely 81.3% higher. This
versus the 600% in earnings growth over the same period.
The company's earnings growth accelerated dramatically in 2011
as it reported an 82.7% earnings growth rate. Yet, apparently an
82.7% earnings growth rate isn't good enough to give Apple a
valuation that is higher than Cisco's (
CSCO
) 15.11 P/E ratio (earnings contracted in 2011), Oracle's (
ORCL
) 16.35 P/E ratio (less than half of Apple's earnings growth) or
Google's 19.19 P/E ratio (grew 15% this year).
Over the past year, Apple has been taken to the woodshed on
every sell-off in the market. It also significantly underperformed
the S&P 500 on the entire QE2 melt-up rally between October
2010 and June 2011. And before you think it's because Apple's
earnings must be slowing, that's clearly not the case. Apple's
earnings have actually accelerated in 2011. Not just grown, but
accelerated. There's a key difference. The growth rate is higher in
2011 than in 2010, 2009, 2008, 2007, and 2006. Basically, Apple's
earnings growth rate this year is higher than in any year since the
advent of the iPhone. Talk about acceleration in earnings. And yet
the stock has gone nowhere this year. See below:
Now if that doesn't shock you, then this will: In fiscal Q2
2011, Apple reported a 6-year record high growth rate of 92.19% in
earnings and 83.22% in revenue. That shatters the previous record
of 86.03% earnings growth in fiscal Q2 2010 and 74.39% revenue
growth in fiscal Q4 2008. After this report, Apple collapsed 14%
over the next 3-month period on concerns that
(insert any B.S. reason here)
. So after reporting the highest revenue and earnings growth rate
in 6-years, Wall Street sells the stock down by $50.00 on the
quarter leading to further massive P/E contraction.
And if that isn't enough to convince you of how mistreated the
stock is relative to its growth, in the very next quarter - fiscal
Q3 2011 - the company absolutely shatters fiscal Q2 2011′s growth
rate in every way. The company recorded 121.94% earnings growth
which is the highest quarterly growth rate since 2004. You would
have to go back almost 8-years when the iPod was just getting
started to find a quarter with a higher quarterly growth rate on
earnings.
Yet, despite this incredible year that Apple has reported, the
stock is trading lower than it did 10-months ago and is now almost
lower than it was a year ago. The company has accelerated and
doubled its earnings, and is almost down on the year. It trades at
under a .5 PEG ratio and less than 8x next year's earnings.
In spite of growing its TTM by 82.7% - which is higher than
every single large-cap company in America - Apple now trades at
decade-low P/E ratio of 13.13. At the beginning of the year, the
company traded at $364.90, which is a little more than $1.00 above
Friday's close. That means that even though the company grew its
earnings by almost 100% on the year, the stock went nowhere. The
chart below shows Apple's growth in its trailing 12-months of
earnings over the past several years:
One would think that with such a nice consistent rise in Apple's
trailing 12-months of earnings that the stock would enjoy a nice
consistent rise as well. But instead, what we've seen is the stock
undergo a very brutal 2-year period of massive P/E compression. In
fact, Apple's P/E ratio has fallen just about 59.12% in just 8
quarters, which means that the company's earnings are discounted by
about 60% more than they were valued at the start of 2010. See
below:
Apple is now trading at the S&P 500 average valuation of 13x
despite growing its earnings at a pace that is higher than the top
100 S&P 500 stocks and higher than 90% of the stock listed on
the index. By pricing Apple at $363, the market is saying that
Apple is worth no more than the average stock. 66% revenue growth
and 82% earnings growth isn't valued at all. Neither is Apple's
$100 billion cash (including fiscal Q1 2012) nor its entire balance
sheet for that matter. In fact, Apple is now valued below the
average stock trading on the NASDAQ-100 which suggests that the
market believes that it is better to hold the NASDAQ-100 (QQQ) than
it is to hold Apple from a valuation perspective.
Now even though Apple's growth has far and outpaced the growth
of Oracle (16.35 P/E), Amazon (96.15 P/E), Google (19.19 P/E),
Cisco (15.11), Qualcomm Inc. (QCOM) (20.62), Amgen, Inc, (AMGN)
(13.53), Comcast (CMCSA) (15.11 P/E), IBM (IBM) (13.95 P/E),
Chevron (CVX) (13.50), Johnson & Johnson (JNJ) (14.94 P/E),
Procter & Gamble (PG) (15.49 P/E), and AT&T (T) (13.91
P/E), the stock trades at a far lower valuation relative to these
top holdings on the NASDAQ-100 and S&P 500. Some of these
companies have actually contracted in 2011. Yet, the market values
the earnings out of these companies on the order of 4-5 times more
in some cases than they value the earnings out of Apple.
Light at the End of the Tunnel
The whole point of this article is to establish one thing and
one thing only. That Apple is extremely undervalued contrary to
what you might hear in the financial press. By demonstrating that
the company is this undervalued, we will then be able to make a
very compelling case for why this cannot go on forever. Eventually,
Apple will hit an inflection point where this 2-year phase of P/E
compression comes to an abrupt end. Apple is already valued below
the S&P 500. If the earnings continue to come in anywhere close
to 50% which is far below the 70-82% we've seen in the past
3-years, then the stock will have to rise significantly in order to
merely maintain its depressed valuation.
For example, in order for Apple to maintain its depressed 13.13
P/E ratio going into 2012 and 2013 - which is right at the average
on the S&P 500 - the stock will have to rise to $577.72 next
year. Most good analysts are expecting the company to report about
$44.00 in earnings next year and about $55.00 in earnings in 2013.
That would be 62% and 25% growth respectively. That's far below the
growth Apple has posted over the past four-five years (see above).
Remember, Apple's growth is currently accelerating and completely
discounted. This outlook presupposes significant deceleration in
the growth rate as the result of the law of large numbers. Yet,
what you should take from this analysis is that Apple has nowhere
to go but up.
Suppose the stock's valuation were to contract further to a 10
P/E ratio within the next two years. Even if we get that level of
P/E contraction which would be at a level that is far below the
average on the S&P 500, the stock would still trade at $550 a
share 2-years from now on the assumption of 25% growth between 2012
to 2013. What happens if the growth stays in the 60-70% range? What
happens if the growth continues to accelerate? Neither of those
scenarios are anywhere even close to being priced in. In fact, Wall
Street is currently modeling for massive contraction in the growth
rate. That's an unwise decision given that Apple just guided fiscal
Q1 2012 - this quarter - for 80% earnings growth. Notice, Wall
Street is modeling for 25% growth while Apple has guided for 80%
growth. Who do you believe?
In future articles, we will build a case for why Apple is
reaching a floor in this age of P/E compression, and is about to
undergo one of the biggest rallies in the company's history. As the
valuation becomes more depressed, the case becomes even more
compelling and the chances for a massive Apple upside correction
increases dramatically. Stay tuned.
Disclosure:
I am long
AAPL
. Andy Zaky is a fund manager at Bullish Cross Capital, which holds
Apple as a major holding in its portfolio.
See also
2011 Leaders Reverse Lower On First Day Of 2012
on seekingalpha.com