Apple Inc (AAPL): Slowdown or Not, Apple Stock Is Seriously Undervalued

Apple has some very serious issues, yet trades at a price that discounts them all

That sound you hear? That’s me tearing my hair out over what to do with Apple Inc. (AAPL) stock.

Apple Inc (AAPL): Slowdown or Not, Apple Stock Is Seriously Undervalued

For years, I have regarded Apple stock as a “growth at a reasonable price” stock (commonly referred to as a GARP stock). Yet, as I hunted and dug into what Apple stock was really all about, my position has been sorely tested.

Here’s what I like about Apple stock and about Apple Inc.: It makes great stuff! We all know it. Its products are sleek, cool, easy to use, easy to troubleshoot and have solved many real-world problems. The stores are fabulous, the customer service there has always been top-notch, things are explained very clearly, and they’ve leveraged the notion of free help at the Genius Bar into just another reason to sell you something.

Apple’s brand of laptops and desktops are infinitely preferable to clunky PCs. If something goes wrong with a PC, forget it. It’ll take forever to fix it. With a Mac, you can usually figure out the problem quickly.

From a financial standpoint, Apple stock is on top of the world. In FY15, Apple stock had a revenue increase of $51 billion! That’s just the increase, which was almost 30%, to $233 billion. That’s more than the entire GDP of most nations. The bottom line: the actual net income (that ignores stuff like stock repurchases) also increased 30% to $53.3 billion.

Free cash flow? $70 billion! I mean, these numbers are absolutely mind-boggling. Apple also has $162 billion in net cash and investments.

It trades at 11.5 times earnings, and if you back out its net cash of $30 per share, that ratio comes down to about 8 times earnings.

The Rotten-Side of the Apple

Here it comes. The stuff I had not considered.

I sure love my iPhone, but I didn’t realize that that product accounts for two-thirds of Apple’s revenue! What?! How did that happen? I thought this was a diversified company! Wrong. Not only that, it hasn’t updated the iPhone for awhile, so its first-quarter may not be so terrific.

That means Apple had better come up with some neat-o new products, and do so in the near future.

Now I love cash. I love it when a company has lots of cash. Except I just realized that 80% of its $200 billion or so in cash is not in the United States.

Because our legislators have seen fit to keep our 35% corporate tax rate, Apple and others have put cash generated overseas into an overseas mattress. If that money comes back in to the U.S., Uncle Sam will pocket something like $60 billion.

That’s not the end of the world, since it’ll still have tons of cash, and on a valuation basis, Apple still only comes in at about 10.5 times per-share earnings for FY2017.

With analysts looking at 11.6% annualized growth, plus about a 2% yield, plus 10% premiums I award for world-class brands, tons of free cash flow and lots of cash, I can’t object to paying as much as 17 times earnings for Apple.

I would then reduce it to something like 14 times based on its non-diversified revenue stream.

Which STILL makes it a buy. So maybe things aren’t so gloomy after all.

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