For two months, from mid-September to mid-November, Apple Inc. (NASDAQ:AAPL) dropped from $700 to about $525 per share- a correction of 25%. The stock was still well up from its levels at the beginning of the year- in early January it was trading a bit above $400- but market watchers feared that the stock would continue down. However, we’ve since seen a rally of about 10% as we close in on the end of the year.
Apple Inc. (NASDAQ:AAPL) had been the most popular stock among the hedge funds and other notable investors tracked in our database of 13F filings for the third quarter of 2012 (see the full rankings), even after the fall in its stock price had begun. Billionaire Ken Fisher’s Fisher Asset Management had streamed into the stock, increasing its holdings by a factor of more than 10 to a total of about 960,000 shares. This made it one of the ten largest positions by market value in Fisher’s portfolio (find more of Fisher’s favorite stocks). Third Point, managed by billionaire Dan Loeb, also added shares and increased its stake to 710,000 shares (check out more stock picks from Dan Loeb).
Apple Inc. (NASDAQ:AAPL)’s fiscal year ended at the end of September, with the company’s 10-K reporting strong growth over the previous fiscal year. Revenue was up 45%, and net income came in 61% higher; earnings were almost triple what they had been in the fiscal year ending in September 2010. Apple also finished the year with a hoard of cash, cash equivalents, and marketable securities totaling $121 billion (mostly in long term marketable securities).
The stock currently trades at 13 times trailing earnings. A multiple in that range generally indicates that the market does not expect much growth in a company’s earnings, so even if Apple Inc. (NASDAQ:AAPL)’s growth rate slows dramatically it would likely be undervalued at these levels. Wall Street analyst estimates place the stock at a forward P/E of 10 and a five-year PEG ratio of 0.6, demonstrating that it certainly has room for a substantial rise in price if it can hit earnings targets. We wouldn’t bet on the company beating earnings, but as we’ve discussed the market seems to be pricing the stock at experiencing little if any growth. If we treat long term marketable securities as cash equivalents and subtract them from Apple’s enterprise value, the EV/EBITDA multiple comes in at 7.3x.
Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) are Apple’s closest peers. Google trades at 22 times trailing earnings- net income has been impacted negatively by the company’s acquisition of Motorola Mobility Holdings. However, we’d think that Google’s bottom line should improve going forward as the Motorola business is integrated and the core Google business continues to grow. The forward P/E multiple is 15, representing a premium to Apple; we’re not sure that’s warranted. Microsoft trades at 8 times forward earnings estimates, though it’s likely that earnings will be temporarily higher as new versions of Windows and Office are released. As a result it seems to be priced about even with Apple, and given the uncertainty over how successful Windows 8 will be we would wait to make a decision here.
We would also compare Apple to Amazon.com, Inc. (NASDAQ:AMZN) and Research In Motion Limited (NASDAQ:RIMM). Amazon was unprofitable last quarter, and projections indicate that it will have very close to zero profits for 2012 even with a strong fourth quarter. Yet the stock has a very high valuation, at 145 times consensus earnings for 2013. Even with its good business opportunities we’d be more likely to consider it a short than a long at that price. Research in Motion has rallied recently on speculation that the new BlackBerry model may achieve good sales. It’s expected to be unprofitable in both the current fiscal year and next year, and so we’d avoid it.
We continue to think that Apple Inc. (NASDAQ:AAPL) is a good value, and likely the best value in its peer group. Its valuation is low enough compared to its trailing earnings that even modest earnings growth would make it undervalued at the current price.
