Apple Inc. (NASDAQ:AAPL) at a recent price of $453.26 is up 17.7% from its 52-week low, hit less than a month ago. At a recent $21.27, Cisco Systems, Inc. (NASDAQ:CSCO) has risen 42.8% from its 52-week low established last July. Microsoft Corporation (NASDAQ:MSFT) has gained 26.4% from its low of $26.26, established in December of last year and Intel Corporation (NASDAQ:INTC) has jumped 24.2% off of the $19.23 low it reached last November. Our first impression might be that these stocks are now overvalued; but, first impressions are often wrong.
Gains can be misleading
Even though these are very impressive gains for those who bought at the bottoms over the last several months, the values that were being placed on these icons of technology at those bottoms were ridiculously low based on any sound fundamental analysis of the businesses. When a business is on sale at a 30% to 50% discount to its real fair value, the share price can rise 50% to 100% and merely return the valuation to a reasonable level. I believe that is the situation that confronts us today with the current prices of these technology giants.
From the darling of tech to pariah
It is a long drop in perception to go from having Forbes contributor Eric Jackson predict a share price of up to $1,650 by the end of 2015 to having DoubleLine CEO Jeff Gundlach refer to it as a “broken company” in a Jan. 13 appearance on CNBC, but that is exactly what happened for Apple Inc. (NASDAQ:AAPL) over the past year. This is exactly the kind of setup where I seek opportunity.
On April 23, Apple Inc. (NASDAQ:AAPL) CEO Tim Cook commented that the company had some “exciting new product categories” that they anticipate will be available this fall. This should help firm the share price through the summer and cause it to rise when these new products begin to be released into the market. New products are nice, but I think what many investors are overlooking are the values of Apple Inc. (NASDAQ:AAPL)’s iTunes brand and its App Store, where, by the time you read this, they will probably have surpassed 50 billion application downloads. The ongoing revenue stream from these businesses and the way they lock in their customer base is phenomenal. Since its launch in 2008, the App Store has delivered $3.86 billion in revenue to Apple and iTunes produced $2.4 billion in just the last quarter alone. I don’t believe these are the numbers of a broken business. If Apple Inc. (NASDAQ:AAPL) shares were to trade at only a 1-time multiple of its five-year projected earnings growth rate of 15%, the share price would rise to $600, based on the current consensus.
Best of all, none of the previous analysis includes benefits to shareholders of the recently announced plans to distribute approximately $100 billion of Apple’s $135 billion cash hoard through dividends and share repurchases.
We can’t survive without our hearts
When it comes to pumping information over private networks or the Internet, Cisco Systems, Inc. (NASDAQ:CSCO) is the heart, as it provides the equipment that makes that data flow. If you believe we cannot thrive and survive without the coordinated flow of electronic data and information around the world, then you must believe in Cisco.
As of January 2013, Cisco Systems, Inc. (NASDAQ:CSCO) was holding nearly $46.4 billion ($8.70/share) in cash and short-term investments on its balance sheet. I believe Cisco will follow the lead of the other tech giants and soon announce plans to return a significant portion of this money to shareholders. Over the past five years Cisco has begun rewarding shareholders more effectively by reducing the outstanding share count by 10% and paying out $2.16 billion in dividends to shareholders.
If the cash holdings of Cisco Systems, Inc. (NASDAQ:CSCO) are deducted from the market capitalization, this business is trading at a ridiculous level of 6.94 times 2013 consensus earnings and the shares are nothing short of a screaming buy at this level. One of my valuation metrics for this type of business is the projected earnings growth rate plus the dividend yield times the next year’s consensus earnings. When applied to Cisco Systems, Inc. (NASDAQ:CSCO), this calculation produces a current fair value of $25.15 a share with an anticipated appreciation of 13% per year for the next five years.
Speaking the language of business
If you are looking to own a business that produces products that are almost inextricably imbedded into the lives of almost every business person in the world, you need look no further than Microsoft Corporation (NASDAQ:MSFT). Microsoft Office is the gold standard of business software. Since it is used by almost every business in the U.S., it must be used by just about any business that wants to communicate with others in a seamless fashion. Best of all, Microsoft can update software every few years with a few new features and cause everyone to eventually have to upgrade while use of the new features becomes common among users. Of course, it also makes the dominant Windows Operating System.
While some growth is coming from its move into the tablet market, the real value of Microsoft Corporation (NASDAQ:MSFT) is in its franchise software offerings, its ability to raise prices and its massive cash hoard. With approximately $8.92 a share in cash and short-term investments currently sitting on its balance sheet, Microsoft Corporation (NASDAQ:MSFT) is well-positioned to continue returning value to existing shareholders as it has been doing for the past five years through $63.6 billion of share buybacks and dividends. If the existing cash is subtracted from the share price, the stock is trading at only 8.95 times the current year’s projected earnings. Considering the dominant position its products hold in our everyday lives, the value should be twice what it is. Based upon the same metric I applied to Cisco shares, current fair value of Microsoft is $33.52 (about where it sits today) with an anticipated forward appreciation of 12% per year.
Final thoughts
Apple is making the transition from a growth business to a value play and seems to be taking the appropriate actions for successful change and, like Cisco, shares are cheap. Microsoft Corporation (NASDAQ:MSFT) appears to be fairly valued right now but should provide 12% annualized gains for years to come between dividends and share price growth.
The article Is Big Tech Still Really Cheap? originally appeared on Fool.com and is written by Ken McGaha.
