Apple Inc. (NASDAQ:AAPL) investors are in a hole today after the company’s quarterly report sent the stock down about 10%. The tech company is now down about 13% year to date and about a third from its peak in September 2012. Though it’s still up 22% from a year ago and almost 300% in the last five years, longs are still starting the year with a paper loss. Apple’s quarterly report was actually not bad in terms of earnings- while the raw earnings per share figure was down slightly, the quarter was 1 week shorter than last years’ and so the rate of earnings was technically higher. There were two primary issues: product unit sales were generally below expectations, and gross margins were unimpressive- analysts have worried that despite the power of Apple’s brand, competitive products such as the Android line will eat away at margins.
With the decline in the stock price Apple Inc. (NASDAQ:AAPL) is currently priced between 10 and 11 times its trailing earnings. We think that multiple implies a market expectation that earnings will decline going forward. That is certainly a possibility, but long term we like the tablet and smartphone markets. In addition, this earnings multiple doesn’t account for the massive amount of cash Apple has on its balance sheet; that figure (including long-term and short-term marketable securities) is up to $137 billion or about a third of the market cap. At an enterprise value of about $300 billion, Apple Inc. (NASDAQ:AAPL) is valued at only about 5x trailing EBITDA. Sell-side expectations are still being updated in the wake of the report but it appears that analysts remain bullish on the company.
Apple Inc. (NASDAQ:AAPL) had been the most popular stock among hedge funds in the third quarter of the year, with 146 funds and other notable investors in our database of 13F filings reporting a position (see more of the top ten stocks). Greenlight Capital’s recent investor letter- from before the earnings report- showed that billionaire David Einhorn still liked the stock and that it was still one of the fund’s five largest disclosed long positions (find more of Einhorn’s favorite stocks). At the end of the third quarter Apple Inc. (NASDAQ:AAPL) was one of billionaire Dan Loeb’s favorite stocks as well, with Third Point’s 710,000 shares being a 67% increase from three months earlier (check out more of Loeb’s stock picks).
Apple looks cheap compared to peers in the technology sector:
We can compare Apple to Google Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), Research In Motion Limited (NASDAQ:RIMM), and Microsoft Corporation (NASDAQ:MSFT). There is an incredible variety of valuations in the market in terms of earnings. Amazon, for example, is barely profitable and yet its enterprise value is over $100 billion; even 2013 consensus implies a very high current-year P/E multiple of 159. Revenue growth remains high- 27%- but we think that the company will have very shortly start seeing even high growth rates than that in earnings to justify its current price. Research in Motion has risen 150% in the last six months on the strength of BlackBerry sales projections, though Wall Street doesn’t expect the company to turn a profit this year. We think it should be avoided.
Google trades at 14 times forward earnings estimates, and the company is showing progress in integrating Motorola Mobility with net income up 7% last quarter versus a year earlier. Microsoft’s forward P/E of 9 is about even with Apple’s; with that company likely seeing a temporary boost to earnings from the sale of Windows 8 and the new version of Office, with it having a smaller cash position than Apple, and with its brand and market position being arguably poorer, it’s tough to recommend Microsoft over Apple.
Apple’s days as a high growth company are over, but the stock price has fallen enough that it seems like a good value for a technology company. The market cap is about 10 times trailing earnings, and EPS should not shrink much (if at all) over the next year. In terms of enterprise value the stock is even cheaper. We don’t think that investors should be selling Apple right now. In fact, it looks like a good value though we would not recommend concentrating too much of a portfolio in the stock. If it is already a sizable position buying more shares might be too much of a risk.
Disclosure: I own no shares of any stocks mentioned in this article.
