Is Apple Inc. (Nasdaq: AAPL) Undervalued?

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Apple Inc. (Nasdaq: AAPL) last year passed Microsoft Corp. (Nasdaq: MSFT) to become the largest technology company by market capitalization. Overall, it's now second only to Exxon MobilCorp. (NYSE: XOM) in size.

But shockingly, even at $323 billion, Apple still looks cheap.

After all, the company still sports a tiny 13-times forward earnings multiple.

In a normal economic expansion, well-regarded growth stocks earn forward multiples of at least 20-times, and often more like 50-times. Using the average 2012 earnings estimate for Apple, the 20-times multiple would put the stock at $536 by the end of the year, up from $350 now.

That looks reasonable, though this assumes that the company does not beat estimates – which it does regularly – and does nothing with its massive cash hoard, which seems unlikely.

And if you subtract out the company's incredibly large cash hoard of $27 billion – which alone is bigger than the combined market cap of the ten smallest companies in the Standard & Poor's 500 Index – it looks even cheaper.

Still, investors continue to treat Apple as if it will never make another successful product. They act like it's about to have its lunch stolen by bullies, or blow its cash for the most amazing company picnic of all time instead of putting it to productive use. And they act as if all of the company's success to this point will suddenly vanish when Steve Jobs finally retires for good.

Some of these concerns are valid on some level, but none are truly likely to undermine Apple's stock in the long term.

I've recommended Apple stock on several occasions over the past decade, and I've been saying for three years that 13-times forward earnings is too cheap for a company with Apple's level of accomplishment. One day, investors will finally feel as if they can dream a little and at least get the multiple up again to where it truly belongs in the 15x – 17x range.

I mention this because Apple has been one of the leaders of this bull cycle, so its fortunes matter to all investors. Apple is trading about $15 under its all-time high, but has jumped about 3% since releasing its fiscal second-quarter report April 20. The new buying intensity it has attracted could help Apple lead the whole S&P 500 back toward new highs.

The key element to keep in mind with Apple is its cheapness, even at $350. In a normal, fully engaged bull market, it could trade at double this value without making one dollar more simply because people will become more optimistic and more willing to bet that its growth will continue.

As long as we see a provably great company like Apple remain undervalued we can feel confident that the bull market that began in the chaos of March 2009 is still going strong.

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  1. Apple Bear | April 28, 2011

    It's not that bullies are about to steal their lunch – it's that others have found the food supply.

  2. John Holder | April 28, 2011

    You quote Apple's cash hoard at $27B but isn't it closer to $66B?

  3. Bob | April 28, 2011

    AAPL closed at 342.41 just before earnings were announced on 4/20. It closed on 4/27 at 350.15. That's 2.2%, not 7%, and that's the point. It's undervalued because it's being manipulated.

    Additionally, I believe AAPL has more than 60 billion in cash, not 27B.

  4. Warren Buffet | April 28, 2011

    You have to disclose your own stock holdings when writing journalistic articles. It seems that you have a conflict of interest.

    Apple is over-valued and over-hyped.

    Be fearful when people are greedy and be greedy when people are fearful.

  5. TruthInTech | April 28, 2011

    just worked a few numbers this morning from the so-called growth stocks e/r reports to determine y/y 2Q growth for comparison:

    aapl: eps -> 95%, rev -> 83%, p/e -> 16 ???

    nflx: eps -> 88%, rev -> 45%, p/e -> 77 ???

    amzn: eps -> neg(???), rev -> 38%, p/e -> 75 ???

    goog: eps -> 19%, rev -> 27%, p/e -> 19

    interestingly, aapl is growing slightly more nflx and significantly more than amzn with a fraction of the multiple. goog growth is significantly less than aapl with a slightly higher multiple. i am not sure goog is high growth consideration anymore, which is ironic considering android growth which is the opposite. on the other hand, aapl just seems extremely undervalued again (very similar now to early '09)

  6. Fisgy | April 28, 2011

    This is BS. I will rather buy bidu or yoku. AApl is over !!

  7. felix mosso | April 28, 2011

    Jon, it would be really nice if your company would answer my 3 phone calls and my 2 letters about my subscription to your Strategic Advantage. I have PAID in Nov but have been cut off as of March 31 ?

  8. apple observer | April 28, 2011

    It seems a bit self serving and disingenuous for Warren Buffet to call out positive comments as irrelevant if someone believes in and owns a stock they comment on, perhaps he owns stock in apple competitors which might taint his opinion of apple, he failed to disclose his interests in those , if any, to accompany his negative views of apple

    This knowledge which might give us a better flavor to his opinions. It would also be interesting to know if he participates in todays technology , hands on or does someone else in his organization work all the computers and smartphones for him? after all if he doesnt understand the technology he cant accurately judge apple's quality, competitive advantages or understand its success. He does however, no doubt understand stock manipulation!

  9. Bob mendez | April 28, 2011

    LONG LIVE STEVE JOBS!

  10. Tom | April 28, 2011

    apple observer you told him:) I also enjoyed how Warren Buffet matter-of-factly stated that "Apple is over-valued and over-hyped" without substantiating this statement in any way whatsoever.

    I think fears over Steve Job's health may have a lot to do with the current $350 price. If all was well with Steve, the stock would possibly be in the $400s already. It's probably a psychological barrier for investors at this point. Lack of any *new* product announcements is probably the other 50%.

  11. W. Tully | April 28, 2011

    So true. Can anyone really deny this stock is being manipulated? Of Course it is. Ditto FORD (F)
    and a bunch of others. I am on the AAPL train – and it ain't stoppin'

  12. TruthInTech | April 29, 2011

    looks like aapl is now is officially the second most profitable company in the world. the pasted microsoft last night after they released their 2Q earnings report. that would the first time in about 15 years or more. they passed them in revenue last fall and beat them by almost 50% this quarter. here are the official numbers:

    first time in about 20 years. aapl first passed them on revenue last fall. here are the numbers:

    AAPL
    revenue – 24.67 billion
    profit – 5.99 billion

    MSFT
    revenue – 16.43 billion
    profit – 5.23 billion

    if this 60-80% growth continues like it has fairly consistently for the last 5 years or more, i would expect them to pass exxonmobile within the year (sans continued speculation in the oversupplied oil market). what wallstreet does not seem to understand is despite their growth and size, apple has very little overhead. they have less than 5% marketshare in primary growing businesses and those mrkts are huge (computers, phones). apple could double or quadruple its size and still not put a dent it them. the stock at cash eq 14 ttm p/e and 8 fwd p/e is extremely undervalued…

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