Despite my roots as a value manager, in recent weeks I have been a fairly aggressive buyer of Apple (AAPL) shares. Such an investment may not seem appropriate for a value investor but as the stock has steadily fallen, dropping below $250 per share, it has actually become quite undervalued. And not just relative to its growth rate, but the broad market as well.
Flush with $45 billion in cash and investments ($50 per share) and no debt, Apple sports an enterprise value of about $190 per share. Compare that to $15 of earnings this year and enough catalysts to make next year’s estimate of $18 seem easily attainable, and you have a stock that actually trades at a discount to the S&P 500. And therein lies the core explanation for my heightened interest recently. How can Apple trade at a discount to the market after factoring in their balance sheet?
While some feel that the company’s recent momentum may be fading, there appear to be plenty of catalysts left to play out over the next couple of years. The iPhone has been a runaway success, even though it still has not been released by the largest cell phone provider in the United States (Verizon). A launch by VZ, expected within the next six months, is sure to reignite the iPhone’s momentum here in the States.
There are other reasons to be bullish as well. According to several press reports, the iPad seems to be catching on in the corporate world far faster than most had expected. Many companies are buying iPads instead of laptops or net books for their employees. Analysts expected most of the early growth to be consumer-related so any stronger than expected success in the corporate market will only add to the bottom line, as corporations typically go with Windows machines.
Not only that, but I continue to expect that Mac sales will continue to grow. It is true that some iPad sales could cannibalize the laptop business at Apple, but I fully expect Apple’s overall share of the global PC market to continue to edge higher in coming years. The only downside is likely to be deceleration of iPod sales, but with the company having both successfully entered (cell phones) and pioneered (tablets) new markets in recent years, there is little reason to think the company will fail to continue above average growth for several years to come.
Even if management remains stubborn about allocating its $50 per share in cash in more productive ways, there is no doubt in my mind that Apple shares will once again trade at a premium to the market in the not-too-distant future. If that happens, Apple stock around $240 per share (today’s price) will likely prove to be a great buy a year from now. My personal target is $300 and it does not take overly aggressive assumptions to get there.
Full Disclosure: Long shares of Apple at the time of writing, but positions may change at any time.