Reports of Apple Inc. (AAPL)’s Demise Have Been Greatly Exaggerated

3. Apple Inc. (NASDAQ:AAPL)’s enjoys the support of a loyal fan base that consistently buys its products; while its ecosystem (e.g., iOS, itunes, and apps store) makes it difficult for customers to switch to competitors.

Reverse engineering Apple’s stock price

At Apples current market price of $433 per share, and with cash per share of around $155, the market is valuing Apple’s operations at $278 per share. Using the free cash flow per share of $46.50 in the past 4 quarters and a 12% discount rate, Apple’s free cash flow needs to decline by 3.8% per year over the next 10 years and with no growth afterwards, to justify this valuation.

If you think this is too pessimistic and Apple can easily beat this growth, then Apple shares are quite undervalued. Otherwise, it is either appropriately priced or overpriced depending on how much you think Apple Inc. (NASDAQ:AAPL)’s business is going to decline.

My verdict

Although it’s only a rough valuation, you can see that the market is significantly underrating Apple’s growth prospects. I think Apple can easily beat the growth implied by its current valuation. On the other hand, I also believe the risks are real – short product life cycles, increasing competition, and a disruptive new technology. Apple could go the way of Microsoft Corporation (NASDAQ:MSFT) or even worse Nokia Corporation (ADR) (NYSE:NOK). Although I think the probability of this happening is low, it is still a legitimate concern.

However, even though I feel Apple Inc. (NASDAQ:AAPL) is undervalued, I have to pass. There’s a reason why Warren Buffett stays clear of technology stocks: The future is too uncertain and the competition is fierce; who knows what the future holds.

The article The Reports of Apple’s Demise Have Been Greatly Exaggerated originally appeared on Fool.com and is written by Zarr Pacificador.

Zarr Pacificador has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Zarr is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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