The only explanation for the ridiculously low price to earnings ratio of Apple Inc. (NASDAQ:AAPL) is that analysts are living in some sort of fairly tale. Perhaps they have all taken a bite of Snow White’s apple and there are not any princes who wish to kiss them.
Compare Apple with Microsoft
Apple Inc. (NASDAQ:AAPL) is a company that manufactures much loved products and has an enviable history of coming up with innovative new products. Microsoft Corporation (NASDAQ:MSFT) is a company whose products are mostly tolerated by their users and the company has a long history of developing products that are total flops.
Apple makes products that people want to buy. People want to find alternatives to most Microsoft products.
So why does Microsoft trade at a price to earnings ratio of 15.83 and Apple Inc. (NASDAQ:AAPL) only trade at a P/E ratio of only 9.56?
Consider that Microsoft is expected to see 5 year earnings growth of 9.03% per year. While, Apple’s earnings are expected to grow at rate of 18.98% per year over the same period of time.
How does a company with an expected annual earnings growth of 18.98% rate a P/E ratio of only 9.56? Shouldn’t Apple have at least the same P/E ratio as Microsoft? That would price Apple’s shares at well above its all-time high of $702. So why is Apple Inc. (NASDAQ:AAPL) stock receiving so little love?
The media is to blame
Apple’s biggest problem is that it grew to be the champion of its industry and news stories about a champion’s demise sell more advertising. Fear always attracts more attention than positive news.
Now nobody expects Apple to repeat that amazing performance. However, an 18.98% annual earnings growth should reasonably be expected to lead to a matching growth of the share price if this fairy tale told more truth.
Teen survey tells the truth
The most telling statistic regarding Apple Inc. (NASDAQ:AAPL) comes from a study recently issued by Piper Jaffry. The study was a survey of 4,800 teens. 1,600 of the teens were from affluent households and 3,200 came from average income households.
Of these teens, 48% already own an iPhone and 62% plan on making an iPhone their next smartphone purchase. Additionally, 51% of the teens own tablets with 68% of those tablets being iPads. Of the 17% of teens who plan to buy a tablet in the next 6 months, 68% plan to buy an iPad.
So forget all those advertising campaigns from Samsung and Google that denigrate the iPhone. Forget all the media headlines about the latest iPhone killer. iOS devices are still the hottest technology.
Questions to expand the truth
The truth beyond the numbers can be a very subjective thing. So ask yourself these questions to develop your own opinion of the strength of Apple’s business.
Do you think Apple’s current customers are going to change to another manufacturer’s device over a feature or two?
Or, would most of Apple’s customer’s rather buy more iOS devices?
Does Apple need to make the greatest product in every way or is a simply great product good enough?
Is the cross platform experience just as important as the features of the devices?
How likely are people familiar and happy with a technology to switch to something new?
Do customers really want to change platforms and have to purchase new apps and software?
If Apple’s computers cost the same price as Windows computers, would any Apple owners buy a Windows computer? Would anybody?
Basically, Apple is in a very solid position with the majority of its customer base. There are more new people wanting to own Apple products than there are existing customers wanting to switch.
Apple employs a large number of very smart and hardworking people who are focused on business development and new products. No matter what the competition comes up with Apple seems likely to at least be in the top three companies in any field.
It is impossible to talk about Apple without mentioning that it has billions of excess cash on hand. Roughly the equivalent of $150 per share! The earnings really only have to justify a share price of $270.
It is time for the analysts to wake up. Apple might not be an explosive growth company anymore but it is definitely a blue chip level growth and income opportunity that should outpace the market as a whole.
Apple Inc. (NASDAQ:AAPL) is currently a strong value stock with a solid 2.5% yield from its dividend. It should be part of the foundation of any solid fundamental investment portfolio.
The article Snow White and the Apple Analysts originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
