What does the future hold?
Most Apple Inc. (NASDAQ:AAPL) skeptics point to the recent decline in gross margin as a sign that Google Inc (NASDAQ:GOOG) and its Android operating system are poised to win the battle for mobile computing dominance. Google and its hardware partners are formidable competitors, but there is no reason to believe that only one platform will thrive over the long haul (both in terms of market share and share price performance). Furthermore, recent data points to Apple gaining market share in the U.S. despite the usual lull as the previous generation of iOS devices prepares for a refresh. It sounds more than a little bit premature to predict the collapse of Apple’s mobile market share.
In addition to hardware sales, there are often arguments that the Google Inc (NASDAQ:GOOG) Play app store or Amazon.com, Inc. (NASDAQ:AMZN)‘s suite of digital music and video apps will bring an end to iTunes’ dominance. Again, this argument is based on the premise that there can only be one winner and conveniently ignores the fact that the entire app marketplace is poised for fantastic growth. Despite this sense of imminent doom, Apple reported record iTunes revenue of $4.1 billion in the past quarter, including $2.4 billion from the sale of media.
And finally, Apple Inc. (NASDAQ:AAPL)’s shares are being pressured because the market demands to know what the “next big thing” will be. Despite plenty of runway left in the existing product lines (iPad sales rose 65% year-over-year), analysts are simultaneously expecting 20% growth while pricing the stock as if no new products will be released. Whether it is iWatch, iTV, or something completely different, Apple is continuing to innovate.
For potential investors who won’t take that statement at face value and demand specifics, consider this: Apple has spent over $1 billion in each of the past two quarters on research and development; this tremendous commitment represents more than a 30% increase over the prior year. Is it more reasonable to think that a company with a proven history of innovation will continue to innovate with this huge budget, or is the pipeline really dry as some fear?
Apple is cheap!
It is getting harder and harder to argue that Apple Inc. (NASDAQ:AAPL)’s stock is overpriced. Meanwhile, the simplified valuation comparison depicted above shows just how easy it is to argue that Apple’s stock is significantly underpriced. How underpriced? That is certainly a matter of opinion. However, Apple’s current position seems to warrant at least a valuation comparable to Microsoft Corporation (NASDAQ:MSFT). Excluding cash and short-term investments, Microsoft is trading at a TTM P/E of 12.5 as noted above; applied to Apple, that would suggest a valuation (excluding cash) of $480 billion.
Adding back Apple’s cash balance of $145 million, this implies a share price of approximately $665. While $665 represents a sizable premium of 55% over today’s share price, this methodology assumes that Apple and Microsoft Corporation (NASDAQ:MSFT)should trade at the same price to earnings multiple. Even more upside exists if you agree with the premise that Apple will continue to grow faster than Microsoft for the foreseeable future.
Is it really reasonable to value Apple Inc. (NASDAQ:AAPL) more cheaply than Microsoft Corporation (NASDAQ:MSFT)? I don’t believe so!
The article Apple Is NOT Microsoft! originally appeared on Fool.com and is written by Brian Shaw.
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