Why the Heck Is Apple Inc. (AAPL) Stock as Cheap as IBM?

Advertisement

AAPL - Why the Heck Is Apple Inc. (AAPL) Stock as Cheap as IBM?

Source: Beni Krausz via Unsplash

Which company would you rather own: Apple Inc. (NASDAQ:AAPL) or International Business Machines Corp. (NYSE:IBM)? Because if you want to buy shares this morning, you will pay 13.35 times earnings for Apple stock, and 13.23 times for IBM.

Why the Heck Is Apple Inc. (AAPL) Stock as Cheap as IBM?

The companies — at least from the standpoint of earnings — are nearly identical.

Now, you’ll get a little bit less of IBM for your money. Big Blue trades at about $162 per each of its less than 1 billion shares. Meanwhile, AAPL stock trades at about $110 for each of its 5.3 billion shares.

But when you buy stock, you’re buying a call on earnings, both now and in the future. We are comparing oranges to oranges here. And these two companies, right now, are among the biggest bargains on the technology landscape.

Why Is Apple Stock So Cheap?

Apple has been cheap for a long time, ever since CEO Tim Cook decided to share the company’s wealth with his investors. What those investors see today is a company with declining sales, declining margins and a dividend yielding just 2.1%.

They might see Apple’s $200 billion in cash and the 25% profit margins, but they certainly don’t value those things. They don’t value AAPL’s success in services, which have enabled it to pay for its huge capital expenditures of the last few years out of earnings.

While investors will pay 29 times earnings for Microsoft Corporation (NASDAQ:MSFT), 28 times earnings for Alphabet Inc (NASDAQ:GOOGL) and a whopping 46 times earnings for Facebook Inc (NASDAQ:FB), they have decided that Apple’s best days are behind it. One analyst thinks Apple’s stock price is going to be cut in half because it’s too reliant on the iPhone. 

Never mind that Apple has plenty of cash to go after automating healthcare, creating virtual worlds and augmenting reality with new interfaces. Never mind that Apple could buy IBM, today, for cash, and still have enough left over to pick up Salesforce.com Inc. (NYSE:CRM) if it chose to do so.

This bearishness is not new. Apple was very near its current price at the start of 2015. Over the last year, the shares are down 6%.

IBM, on the other hand, is up almost 18% in 2016. And that’s the mystery.

Why Is IBM stock So Dear?

I’ve suggested breaking the company up, and IBM is vulnerable to the kind of slash-and-burn tactics Wall Street hedge fund managers love to deploy on failure. Sell the assets, dump the employees, throw the retirement obligations on the taxpayers and profit!

IBM has long been in the practice of extracting its own capital and giving it back to shareholders. The dividend has doubled in the last five years even though sales are down 20%, and the debt-to-assets ratio has been climbing steadily.

IBM’s mainframe franchise is profitable but circling the drain in the cloud era. Its cloud is not considered competitive against those of Amazon.com, Inc. (NASDAQ:AMZN), Alphabet or Microsoft. It continues to buy companies with lots of employees, and let lots of employees go. Its vaunted corporate culture is in tatters.

Watson, its front-end for real-time analysis of cloud data, sounds great on TV, but IBM doesn’t break out Watson revenues when it reports earnings, and some analysts think they know why — failure.

I’m sorry, I don’t get it. I’m supposed to buy this instead of Apple?

Maturity vs. Senility

The argument for IBM boils down to a dividend yielding 3.45% against 2.1% for Apple stock, its potential in things like artificial intelligence, and management’s continual ability to pass earnings along while downsizing the company.

This would make sense if IBM and AAPL were making cars or refrigerators, or if they were oil companies. Pure financial analysis makes sense in those industries. But technology, at least for me, is a different ball game.

When I consider a technology investment, I want to see the future. I can see the future in Apple. Devices and clouds are the key technology of our time, they put the whole world of computing into the palm of your hand, you can call it up with the sound of your voice. If that’s not enough, Apple can buy into any related business it wants.

IBM, on the other hand, is 100 years old, its best days are behind it, most of its product line is as stale as last week’s bread, and it’s purely a dividend play.

But if that’s where the market wants to put its money, go for it.

See you in five years, and we’ll compare notes.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/apple-inc-aapl-stock-ibm/.

©2024 InvestorPlace Media, LLC