The biggest story on Wall Street in recent months has been the
plunge in Apple's (NASDAQ:
) share price. The stock, which for a long time only went up, has
fallen around 35 percent from all-time high levels above $700
which were hit in September.
The reasons for this have been debated endlessly, but one of
the major concerns that investors have pointed to is falling
margins for iPhone, which according to Trefis research, accounts
for around 55 percent of Apple's valuation. Other reasons for the
decline that have been bandied about include weak PC demand
hurting Mac sales and dissatisfaction with the iPad Mini price
point relative to competitors such as Google's (NASDAQ:
) Nexus 7 and Amazon's Kindle Fire tablets.
The most recent leg down in the stock came in the wake of the
company's first-quarter earnings results. While net income was
above consensus estimates, both sales and margins were a cause
for concern. Net sales rose 18 percent to $54.51 billion, which
missed estimates of $54.73 billion.
Gross margin was down sharply from 44.7 percent a year ago to
38.6 percent in the company's fiscal first-quarter. Operating
margin went from 37.4 percent to 31.6 percent. Apple also guided
for second-quarter sales which were below Wall Street
The revenue shortfall was largely due to iPhone sales that did
not meet some analysts' expectations. Nevertheless, iPhone sales
rose 29 percent year over year to 47.8 million units. Margins are
under pressure due to increased competition and could continue to
fall as Apple's markets mature. Trefis also points out that
margin compression was exacerbated in the most recent quarter due
to new product launches.
The latest quarterly results from Apple are the third time in
a row that the company has missed estimates. The fiscal Q4
report, which was released on October 25, 2012, showed that
declining iPad sales had weighed on earnings. Apple missed
consensus earnings per share estimates in the fourth-quarter,
reporting EPS of $8.67 versus consensus of $8.75. Revenues,
however, unlike in Q1, were above the Street -- but not by much.
Apple reported sales of $35.97 billion compared to consensus of
In the first quarter, both gross margin and operating margin
were only down slightly year over year. Apple's string of
disappointing earnings reports have certainly contributed to the
decline in the stock, but there are other more important factors
at play. In fact, the real reason that Apple is down so much
makes the stock extremely compelling at current rock bottom
valuations. Simply put, Apple's share price is being pushed well
below its intrinsic value because of supply/demand dynamics in
the market and momentum.
It is always important to remember that over the short-term
stock prices are determined by supply and demand and not
fundamentals and valuation. Currently, Apple's fundamentals and
valuation has taken a back seat to a shift in the supply/demand
dynamic in the stock. Apple is the largest holding of hedge funds
and other fast money traders. Due to its size, it is also one of
the very largest holdings of all institutional investors.
Furthermore, most of these investors were sitting on very
large gains in the stock. Once hedge funds and other investors
began dumping the shares after Apple reported a few quarters of
mildly disappointing results, downside momentum picked up and
overall sentiment changed rather dramatically. Instead of
speculating when AAPL will hit $1,000, the question on Wall
Street is when the stock will hit $300.
Since everyone already owned AAPL over the last couple of
years, there is huge supply. Now that the downtrend has been
established, buyers have been scarce and unable to meet supply.
Sooner or later, however, supply and demand will find an
equilibrium point and valuation and fundamentals will matter
again. At this point, today's dirt cheap valuation will look like
Apple is basically the cheapest large tech stock on Earth.
Other technology leaders such as Amazon (NASDAQ:
), Facebook (NASDAQ:
), Google (NASDAQ:
) and even Microsoft (NASDAQ:
) are much more expensive on a valuation basis. In fact, Apple is
trading at a valuation that is more in-line with capital
intensive industrial and manufacturing businesses.
At current levels, the stock is trading at a trailing P/E of
10.38, a forward P/E of 9, and a PEG ratio of 0.52. Its
price/book ratio is 3.35 and its Enterprise Value/EBITDA multiple
is 6.58. Investors will be hard pressed to find a cheaper stock
in the high-flying technology sector.
If you back out the cash on the company's balance sheet,
around $137 billion, then Apple is trading at roughly 7x 2012's
net earnings. Essentially, investors have the opportunity to buy
the best business on the planet at a 7 multiple.
Another interesting way to calculate Apple's current valuation
is to figure out the stock's P/E using the last 4 years of
earnings. This helps to mitigate the effect of Apple's stunning
results over the last couple of years. The company's average net
income between 2009, when it reported income of $8.2 billion, and
2012 when net income was $41.7 billion, was $22.47 billion.
Therefore, Apple shares are currently trading at around 19x
the last four years' earnings. If we applied that same multiple
to Wall Street earnings estimates for fiscal 2014, Apple's stock
would be trading at $967.
The current value proposition in the name is extremely
compelling. Investors are able to purchase Apple's tremendous
business and brand, including iPhone, iPad, and the entire iOS
ecosystem, for just 7x last year's earnings. The brand itself was
estimated to be worth $87.1 billion in 2012 by Forbes, a year
over year gain of 52 percent.
Furthermore, at today's prices, there is no innovation premium
whatsoever in the stock. This is pretty incredible considering
the innovation that Apple has consistently brought to the market
with iPod, iPhone and now iPad. The market is essentially pricing
the stock like it will never release another new product again.
This is primarily due to the shift in supply/demand for the
shares which has little to do with fundamentals and more to do
with sentiment and momentum.
Another factor that underscores Apple's value properties is
its recent institution of a dividend and share buybacks. At
current levels, the stock is yielding around 2.30 percent and
that yield rises which each leg down in the share price. Given
the company's cash horde, Apple will likely become more and more
shareholder friendly over time by raising the dividend and
implementing larger buybacks. Very, very few companies are in as
favorable of a position to reward shareholders.
When you add it all up -- the business, the brand, the
valuation -- Apple may be the world's most attractive value stock
right now. The bottom line is that when the planet's most
innovative company has one of the cheapest stock prices in the
market, it is time to buy with both hands.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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