Even the mighty can falter.
Not too long ago, chatter was that Apple Inc. (AAPL) was set to be the first trillion dollar company. It looked like nothing could stop AAPL and its iPhone cash machine.
But now the iPhone is in a funk and Google parent Alphabet Inc (GOOGL) finds itself on Apple’s heels.
Earlier this week, the once unthinkable came to pass. AAPL (briefly) lost the title of world’s most valuable publicly traded company. It fell to No. 2 behind GOOGL and its market capitalization of more than $534 billion on Tuesday before Google slid just enough to let Apple regain the lead.
Apple isn’t giving up the title just yet, but Google might not yield so easily either, which means we may end up with a bit of back-and-forth in the near future.
But even if GOOGL manages to be bigger than AAPL, that doesn’t necessarily make it better. As much as AAPL has struggled recently, it still looks like a quality stock. Even better, it appears to be on sale.
Google stock, for its part, also looks good at current levels. And when it comes to market sentiment, Google stock beats Apple stock hands down. Just look at the respective price-to-earnings multiples. GOOGL changes hands at 18 times forward earnings. Investors clearly feel pretty good about Alphabet’s growth prospects.
Apple stock, on the other hand, is valued almost like it has no future to speak of. Indeed, AAPL goes for about 10 times forward earnings. That comes despite a long-term growth forecast of nearly 12%.
Think about that for a moment. Investors are willing to pay bigger premiums for essentially no-growth telecommunications and utilities stocks than they are for Apple.
But things aren’t that bad.
GOOGL Has the Growth, but Apple Stock Has the Right Price
Yes, for the first time in history, Apple is predicting a year-over-year decline in iPhone sales. Revenue is expected to decline for the first time in more than a decade.
The market sees this as proof that the Apple growth story is over. Maybe, but we’ve been here before; growth was anemic before we got iPhone 5s. And then it came roaring back.
Perhaps we really have hit peak iPhone saturation. So what? AAPL hasn’t been valued like a growth stock in years, anyway. At the same time, it has more than $200 billion in cash and generated free cash flow of more than $20 billion in the most recent quarter.
Show me a telco or utility with those kind of numbers.
Look, it’s reasonable to be concerned about recent missteps. The latest iterations of the iPhone were hardly hits, and Apple Watch is a borderline flop. But slapping this kind of discount on Apple stock is really overdoing it.
Alphabet has better growth prospects than AAPL, but they are also more accurately priced into Google stock.
If you go solely by valuation, Apple stock is better than GOOGL. It may take a while, but at some point the market will recognize that AAPL is seriously underpriced. Nothing has to change on the bottom line to get Apple stock going. Multiple expansion alone would sent shares soaring.
The iPhone 7 is the most likely catalyst for such a move. As long as it lands well, we’ll quickly forget about AAPL’s bout of weakness — it’s happened before. And if it happens again, Apple will be able to defend its title against Google stock for that much longer.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
