Microsoft Corporation (NASDAQ:MSFT) has been desperately trying to enter the mobile space with Windows 8, but has only been met with muted success. Apple, on the other hand, is a leader in the mobile space with real products that sell well and should continue to sell well into the future. The market is saying that, based on PE ratios, Microsoft Corporation (NASDAQ:MSFT) is much more valuable than Apple Inc. (NASDAQ:AAPL), and I don’t buy that premise. Both companies pay a good dividend and produce great cash flows, but I see Apple holding its own given the stickiness of its ecosystem and the loyalty of its customer base.
Apple supplier Cirrus Logic, Inc. (NASDAQ:CRUS) announced weaker guidance for the rest of the year, and that broke the previous low around $420 for Apple shares. Cirrus Logic is selling for the ridiculous PE of less than 8, having been hammered in the Apple plunge. Cirrus Logic, Inc. (NASDAQ:CRUS) produces audio component chips for iPads and iPhones, and relies on Apple for 50% of its business, so by predicting future shortfalls, the market is seeing that as a proxy of falling demand for Apple.
The stock market at this point is predicting a total collapse of iPad, iPhone and Mac sales. These devices are taking off in emerging markets, but Apple may be missing the price point necessary to capture these high growth areas of the world. Microsoft, on the other hand, can target that lower price point if it decides to be more aggressive about pricing its software. Apple Inc. (NASDAQ:AAPL) has staked out a higher price point and may miss out on that growth, particularly in China, India and other emerging markets. Android software is free and thus has the advantage in these markets.
I don’t think Apple sales will collapse, and I am riding out the storm. With a cash position of $150 billion, the absolute low that Apple stock could hit (besides zero with a bankruptcy) would be between $150-$200 a share. While its products going forward may turn out to be more evolutionary than revolutionary, that does not justify current valuations. Apple is in much better position than Dell Inc. (NASDAQ:DELL) or Hewlett-Packard Company (NYSE:HPQ), both of which are selling at valuations comparable to Apple.
My advice is to slowly dollar cost average into Apple Inc. (NASDAQ:AAPL) if you don’t own the stock. If you believe that Apple remains grossly undervalued then hold on to the Apple shares you have now. At these levels, the madness may take a year or two to be resolved, but I’m a firm believer in the company fundamentals and the ability of Apple to innovate in the future. There are a number of rumored products in the pipeline, and I see Apple developing at least one or two of these with some success in the next two years.
The article Lessons Learned from the Apple Debacle originally appeared on Fool.com and is written by Erick Santos, M.D., Ph.D..
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