It’s almost incredible how cheaply Apple Inc. (NASDAQ:AAPL) is trading, even after a 10% post-election gain, and with the stock near a 52-week high. On a trailing 12-month basis, AAPL stock’s current price around $115 implies an earnings multiple of just around 14. But that figure doesn’t account for the company’s huge cash hoard — more than $237 billion at the end of fiscal 2016.
To put that figure in perspective, it’s enough to buy all but 14 of the companies listed on U.S. markets. Apple could acquire a giant like Intel Corporation (NASDAQ:INTC) or Oracle Corporation (NYSE:ORCL) … and still have enough to buy Sony Corporation (NYSE:SNE) if it so desired.
Adjusting for that cash lowers Apple’s valuation to negative growth levels. Even after applying a 65% value to the $216 billion held overseas to account for taxes, and subtracting debt, Apple still has more than $15 per share in net cash. Backing that out, the earnings multiple falls to 12.2x. Assuming the GOP and President-elect Donald Trump are successful in implementing a 10% tax rate for repatriation, the tax-adjusted net cash figure would move to over $25 per share. That’s more than 20% of AAPL stock’s current value. And it means that the “big move” of the past few weeks (Apple has risen about $11 per share since the election) really just prices in that impact.
It also means that, even adjusting for taxes, Apple trades at roughly 11 times fiscal 2016 earnings. That’s a stunning figure in the context of other stocks trading at similar levels.
While Apple bears argue that challenges — such as “commoditization” of the smartphone industry — support a compressed multiple, a look at what types of stocks receive similar multiples shows just how pessimistic the market remains toward Apple.
And those comparisons highlight just how cheap AAPL stock remains.
Peer Comparisons to Apple Stock
The problem with using the standard method of peer comparison when valuing Apple stock is that Apple, quite literally, is peerless.
It’s the largest company in the world by market capitalization, a full $75 billion ahead of Alphabet Inc (NASDAQ:GOOGL). And while GOOGL stock might seem a valid comparison given the roughly 50/50 split of the U.S. market between iOS and Android, Google’s role in the Android ecosystem mostly is limited to software and services. (The new Google Pixel may change that.) Much of the profit from Android is going to manufacturers like Samsung Electronics (OTCMKTS:SSNLF) or LG; in iOS, however, Apple keeps those sales for itself.
So to understand AAPL’s trailing 11x-plus cash multiple — a figure that drops to 10x based on analyst consensus for fiscal 2017 — it’s worth considering what type of stocks do receive similar multiples, even if they have their differences from AAPL stock.
One category that jumps out is PC manufacturers. The bearish argument against AAPL is that smartphones today look much like PCs a decade ago: near a peak, with pricing declines coming as low-cost Asian manufacturers enter the market and “high-end” features become increasingly cheaper. What’s notable about AAPL stock at the moment is that it is priced as if that eventuality is a certainty.
For instance, when Dell was taken private in 2013, its trailing 12-month adjusted EPS was $1.28, implying a P/E multiple of 11x. And in the first half of its fiscal 2014 (the last quarters reported before the deal closed), its adjusted EPS declined 51%. Dell was a company in free fall, but founder Michael Dell took it private at the same multiple at which AAPL trades today.
Even more amazing, three years later a Delaware court would rule that the price was nearly $4 per share too low!
A more current example is HP Inc (NYSE:HPQ). HPQ’s guidance of $1.55-$1.65 in non-GAAP FY17 EPS implies a 9.5x multiple at the midpoint — just under AAPL’s 10x forward multiple. More than one-third of HP Inc.’s fiscal 2016 revenue came from printers — a category that is declining double-digits in developed markets with no sign of a turnaround.
A few other notables:
- Xerox (NYSE:XRX) trades at 8x EPS despite a long-term decline in copiers and printing, and an inability to get its business services segment (which is to be spun off) growing.
- Pitney Bowes (NYSE:PBI) trades at over 9x — again, close to AAPL — despite the continual shrinking of its postage meter business.
- Moving to a different industry, Macy’s (NYSE:M) trades at over 11x its fiscal 2016 EPS — a higher multiple than Apple stock — despite significant, long-term pressure on sales that is forcing it to close over 100 stores.
From a valuation standpoint, Apple is being lumped in with companies whose declines already are occurring and who have little, if any, chance of reversing them. Yet Apple’s demise, for now, is only a bearish prediction.
And the negative growth implied by the market ignores multiple positive catalysts. Apple’s services revenue was $24 billion in FY16, up 22%. A repatriation of overseas cash not only impacts valuation, but could drive additional share repurchases and easily support a dividend yield of 4%-plus at current prices. Samsung’s Note 7 disaster opens a door for further iPhone share gains in the U.S. The Indian market long has been coveted by Apple and represents a significant opportunity, as CEO Tim Cook discussed on the fourth quarter conference call.
Why AAPL Stock Is So Cheap
The relative valuation of AAPL stock highlights two key reasons why shares are undervalued.
The first is that the market clearly is treating Apple as a business already in decline, at least comparing it to other companies. The second is that the market is ignoring the fact that Apple isn’t running itself like a declining company.
As CFO Luca Maestri pointed out on that Q4 call, R&D spending increased 25% in fiscal 2016, as the company targets new opportunities in artificial intelligence, automotive, consumer accessories and elsewhere. If the bears are right, Apple can adjust. A “cash cow” focus — like that at HPQ or Dell — could allow the company to cut opex significantly, and boost margins, profits and cash flow.
The conclusion is clear: Apple stock simply is too cheap. And that’s because it is priced as if the bears are right … and then some.
Apple has some pressures, to be sure, but those bears haven’t been proven correct yet. AAPL stock, however, continues to be priced as if they have.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.