Apple stock was up about 3.5% today (Wednesday) following an impressive Q4 earnings report, but AAPL should be trading much higher.
"This stock is absolutely undervalued," said Money Morning Capital Wave Strategist Shah Gilani on the FOX Business program "Varney & Co." this morning. "They're going to buy more shares, they've got so much cash. This stock is going to continue to grow."
Currently trading at about $118.50, Apple Inc. (Nasdaq: AAPL) stock has a laughably low price/earnings ratio of 13.63. It's forward P/E is just 10.88.
To get an idea of how cheap AAPL stock is right now, compare that to the P/E ratios of fellow tech giants Microsoft Corp. (Nasdaq: MSFT) and Alphabet Inc. (formerly Google Inc.) (Nasdaq: GOOGL, GOOG). The Alphabet P/E is 30, while Microsoft's is 35.44.
The P/E ratio for the Standard & Poor's 500 is just below 22. If Apple had a P/E of 22, it would trade at $190 a share – a 61% gain from the current Apple stock price.
So where is Wall Street going wrong?
Two related issues keep tripping up the "experts." One is that Apple is too dependent on the iPhone. The other is that sales in China have become Apple's primary source of growth.
It's true. The iPhone represents about two-thirds of Apple's revenue and profit. Although Greater China was just under 25% of Apple's revenue in Q4, the year-over-year growth in that segment has been phenomenal.
In the Q4 Apple earnings, sales in Greater China (which includes Hong Kong and Taiwan) grew 99% over the same period last year. Total iPhone sales were up 120% in mainland China.
Many perceive this as a major risk for Apple stock. They speculate on the impact of a slowing Chinese economy, or the possibility that consumers will abandon the iPhone for lower-priced competitors.
And they might have a point if any of that was happening. Meanwhile, they're overlooking a far more obvious and more likely possibility – that China will fuel massive sales growth for Apple over the next few years.