Apple Inc. (AAPL) is one of the cheapest large companies in America. But is the maker of the ubiquitous iPhone truly a bargain or is it cheap for a reason?
After all, we all remember the story of BlackBerry Ltd (BBRY). BlackBerry looked cheap by any traditional metric, but the stock never recovered; it just kept getting cheaper until it finally blew up. Now the company is a fraction of what it used to be.
Last month, a tech writer and Apple enthusiast suggested that, just as Apple bested BlackBerry by fundamentally changing the ways smartphones are used, Apple is now at risk of being bested by artificial intelligence by Alphabet Inc (GOOG, GOOGL), Amazon.com, Inc. (AMZN) and others.
If artificial intelligence fundamentally alters the way we use our phones — and good ol’ Siri can’t keep up — then Apple Inc. could get leapfrogged in a hurry. At that point, Apple stock isn’t a value … It’s a value trap.
So, which is it? Is the market wise enough to discount Apple’s lack of competitiveness on the AI front … or is Apple stock’s recent cheapness merely the result of Wall Street’s notoriously short attention span?
Apple Stock: Bargain or Just Plain Cheap?
I would argue it’s the latter. Apple was an early adopter in AI with Siri, and while Siri has lagged behind more recent competitors from Google, consumers haven’t fully embraced AI … and they might not for a long time.
Personally, I try to strike a balance between Star Trek enthusiast and technology luddite. I like the option of using voice commands, particularly when sitting in my car. Smart devices that don’t require my eyeballs and fingertips are a no brainer if for no other reason than driver safety. But really stop and think about how, when and why you use your smartphone.
When you’re sitting at the airport waiting for your flight, checking messages between meetings or even just sitting in bed before you drift to sleep, AI isn’t particularly useful or desirable. And voice recognition would not only be useless, but actually detrimental.
The idea that a fundamental rethink of the smartphone ecosystem would be dangerous to Apple is a valid one. Just as Apple did to BlackBerry, someone else could just as easily do to Apple. Disruptors get disrupted in tech all the time. I just don’t see anything on the horizon that would fit the bill.
While artificial intelligence is disrupting back offices and customer service departments and AI-driven smarthomes are quickly going mainstream, I see all of this as existing alongside Apple’s ecosystem rather than destroying it … at least for the foreseeable future.
Bottom Line on AAPL Stock
Let’s take a look at Apple stock: At current prices, AAPL trades for just 10 times earnings (both trailing and forward). That’s less than half the valuation of the S&P 500 Index. Most recent estimates put the P/E ratio of the S&P 500 at 24.
If you strip out Apple’s cash hoard, you get a P/E ratio in the mid-single digits. That is ridiculous. There’s just no other word for it.
I’m not particularly bullish on U.S. stocks at current prices, however. I’m expecting very modest returns over the next five to 10 years based on today’s valuations. But to the extent you own stocks at all, Apple is one that warrants a place in your portfolio.
Apple’s iOS ecosystem, however, will eventually be displaced. Nothing last forever in the world of technology. But that day would appear to be a long way off.
As of this writing, Charles Sizemore was long AAPL.