Apple (AAPL) Is Still Undervalued, Even at Record Highs

Close-up of Apple iPhones on display
Credit: Edgar Su / Reuters -

Yesterday, Apple (AAPL) hit a new all-time high during the day’s trading before dropping back a little to close below that mark. This morning, the stock is once again indicating a higher opening and looks like setting another record during today’s session.

And yet, even at these levels, AAPL is still undervalued.

Apple 1 year chart

This is something I have been saying for years. Maybe it is because traders and analysts have trouble dealing with the massive numbers that an analysis of Apple’s business involves. The law of large numbers when it equates to stock analysis refers to the fact that it is a lot harder to achieve 10% growth on the annual sales of $325 billion, as Apple posts, than it is on, say, the $43 billion reported by a company like Caterpillar (CAT).

Despite those massive numbers, though, Apple has indeed continued to grow. Over the last five years, sales have gone from $227 billion, a number that a lot of people thought was prohibitive, to the aforementioned $325 billion during the last full trailing twelve-month period. It has not been a completely smooth path. Back in 2018, growth stalled for a while and trailing twelve-month sales actually dropped for a couple of quarters, but the company responded with some iPhone updates and other product changes that restored growth, and they haven’t looked back since.

Apple chart

Today, if a report from Bloomberg is to be believed, we learn that Apple is asking suppliers to ramp up production of the new generation of iPhones by around 20%, suggesting that, once again, everyone has underestimated the potential of their upcoming launch, expected in September.

As rumors have circulated about what that launch will entail, the doubters have had a field day. The suggestion is that it will simply be a few tweaks to the existing 5G models, and that even those incremental changes will be mainly about catching up with innovations already being used by competitors. All of that is probably true, but those aren’t bugs in Apple’s product updates; they are features.

A lot of people seem to think that Apple is a great innovator, but that really hasn’t been the case over the last dozen years or so. What they tend to do is to allow others to innovate -- and sometimes fail -- before perfecting the tried and tested technology, and then marketing the resulting product extremely well. It isn’t a sexy strategy, and it is in part why AAPL isn’t seen as a sexy stock these days. However, as I said back in January, I would still rather own it than other, trendier names, because they have continually shown that it works and that they can grow from any position.

If you look at these levels and recoil from buying at the highs, I hear you and it might pay to wait a couple of weeks. I am long the stock and have increased my holdings over time by buying on dips, the strategy that I outlined most recently in May, and there is a good chance that there will be an opportunity to do that again soon. Apple will report earnings on July 27 and if history is any guide, that will prompt a drop in the stock, almost no matter what.

Last quarter, for example, a 50% beat of expected EPS and financial records all around led to a drop of over 10% in AAPL over the subsequent two weeks. Of course, looked at with hindsight that is ridiculous, but it happens a lot with this stock because people react to words, not actions. Tim Cook tends to be cautious in earnings release commentary and probably will be again, which often leads to selling based on a perceived lack of optimism.

Those, however, are just words. The real level of optimism at Apple is evidenced by their urging more production from their suppliers, than by anything Cook might say to analysts and investors. On that basis, AAPL is undervalued by at least 20%.

Do you want more of Martin? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free weekly newsletter with in-depth analysis and trade ideas focused on just one long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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