The onslaught of Apple Inc. (AAPL) is still very much around. It’s still trading very well below its 52-week high of around $135 a share.
That could become even worse from the market’s viewpoint following reports this morning that Alphabet (GOOG, GOOGL could overtake Apple as the world’s most valuable company in 2016 — by market capitalization.
As of this morning, AAPL stock only had about $60 billion more in market cap over GOOG. And looking at the charts, it looks like Google could actually overtake AAPL stock this year, with Apple seeing its market cap drop from about $800 billion to about $560 billion over the past year.
On the other hand, Google has been seeing its market cap go up.
An analyst told MarketWatch that Apple is only bigger than Google right now because of the huge stash of cash Apple is currently sitting on.
While that sounds valid, the real story is that Google is only closing in on Apple because of the turbulent period AAPL stock is going through, which as I argued in a previous article, is overblown.
Google is a great company, one I would doubtlessly invest in. However, this market cap trend that some analysts want to dwell on is only a reflection of how much discounting AAPL stock has seen over the last one year.
I looked through the metrics of AAPL vs. those of close competitors Google and Microsoft (MSFT) and found these three to support my discounting claim.
1) Apple Is Undervalued
If you’re a value hunter, then price-to-free cash flow must mean a lot to you. And it’s simply the ratio of a company’s cash generated after capital expenditure has been removed (free cash flow) that the market has factored into the company’s stock price.
Meaning the smaller the ratio, the smaller the percentage of cash generated recognized by the market in the company’s stock price. Obviously, lesser would be good — especially vs. competitors.
At the moment, AAPL trades at 8 times free cash flow. By comparison, Alphabet trades at 34.6 times free cash flow, while Microsoft trades at 18.5 times FCF.
In fact, Apple’s price-to-FCF has been on a decline over the last five years, while those of the other two are going up — Alphabet being the highest.
This means that the market has been continuously factoring a lesser percentage of Apple’s cash generated into its market price over the last five years.
Sounds like a five-year cash flow discounting streak to me.
2) Apple Gets the Most out of the Capital It Invests
Looking at the metrics, I also found that Apple has been consistently and increasingly getting more out of its invested capital.
As of the end of the third quarter of 2015, AAPL stock had a 31.66% return on invested capital for the trailing twelve-month period. Again, by comparison, Google had a 14.56% return on invested capital for the same period, while Microsoft had the lowest return at 10.45% for the same period.
One other interesting thing to note is that Microsoft has been increasingly seeing a smaller return on invested capital over the past five years, dropping from about 38% in 2011 to 10.45% as of the end of the third quarter of 2015.
In Google’s case, the decline has only been gentler than that of Microsoft’s.
Yes, this might mean that both Google and Microsoft have made some investments that won’t start paying off for some time. However, I would like to see Apple’s dominance in this regard as having a higher degree of stability over the other two.
3) Apple Spends Less of Its Revenues on R&D, but Still Grows Revenues Faster
It’s a common knowledge on Wall Street that tech companies aren’t the best when it comes to paying dividends because they have to invest a lot in growing the company, of which research and development is a means of finding growth.
So you should expect that the more a tech company spends on research and development, the faster its revenues should grow, right? Well, that’s not quite the case here: Apple spends the least of its revenue on R&D of the three companies, but it has still been able to grow revenues faster than Google and Microsoft for the last five years.
I would like to disclose that I’d sure invest in both Microsoft and Google, as they both have their strengths. The point here is just to show you the opportunities that lurk in Apple stock.
You might say putting a value stock tag on Apple belongs in the early 2000s, but these metrics show that AAPL is just as much a value stock today as it was in the early 2000s.
As of this writing, Craig Adeyjanu did not hold a position in any of the aforementioned securities.