10 Reasons Why Apple Stock Is Under-priced - Part II

  • Apple's stock has the ability to surge more than 16%  in the next few months.
  • The company has numerous growth areas: Increasing  its 19.9% market share in wearables, increasing its China sales and the ability to revive and revamp 30.3% of its deteriorating businesses.
  • It is listed as the most valuable company in the world and yet it only trades at ~ 8.3X EBITDA and ~13X earnings.

This is continuation of the post on why Apple (NASDAQ:AAPL) is under-priced. In the previous post we discussed several reasons which indicate that Apple stock is under-priced, including its estimated EPS growth rate being significantly below what the company has achieved in last few years and its ability to maintain its profit margins and revenue growth inspite of strong currency headwinds. In this post we pick up from where we left in the previous post, which can be accessed here.

#7: Apple Watch and Apple Pay. The global wearable market is expected to grow by 35% over the next 5-years and electronic payment systems are likely to take-off in a good way. Apple has products in both of these markets. However, the Apple Watch and ApplePay have not gained the instant momentum that was expected, but it is too soon to make any constructive assessment. Apple has been known to be a pioneer. But in both these markets, it has been a late entrant. Growth can take time.

Source: iCharts


However, one of the most interesting data points is how Apple managed to penetrate the wearable market. Going from having 0% market share to having 19.9% in one quarter is really impressive. According to data from the International Data Corporation (IDC), the wearable market grew 223.2% in Q2 2015 from the previous year. Having a company gain 19.9% in one quarter with promising future growth prospects in a market that grew 223.2% in the last 12-month is indicative of a strong player in a fast growing industry.

Source: IDC Press Release

market share

#8: Apple's China Story Remains Intact. Using Apple's Q4 2015 results, iPhone sales account for ~ 63% of Apple's total revenues. This explains why the stock took a nosedive in anticipation of disappointing China sales. But looking at Apple's Q415 results, you notice that this should not be a concern. Apple grew sales in its China region by 99% y/y despite currency headwinds and slowing economic growth in China. Nonetheless, the stock did not surge to reflect its impressive quarter because of concerns over the iPhone's long-term growth and the initial performance of the Apple Watch.

The iPhone faces the same challenges every other smartphone maker worries about. The ability to charge a premium price on the new phones can diminish if the new phone is not significantly different from the old one. Hence, the reason why Apple is trying to diversify its revenue stream by getting into other markets. Also, a few months ago, Apple was not into the watch business. The fact that it managed to enter a new market and secure ~20% of the market share is impressive by any standards. Therefore, by looking at Apple's impressive quarter and the weaknesses in the iPhone's growth prospects and Apple Watch initial performance arguments, I see no reason why Apple should not surge another 16% to its July high of $132.07 in the next few months.

#9: Apple's strong growth area lies in its ability to revive ~30.3% of its sources of revenues. Narrowing the narrative on Apple to iPhone sales does not give a full picture. I understand why this is the case. iPhone sales accounts for ~ 63% of Apple's total sales. However, because of the premium nature of Apple's iPhone's, iPhone sales are likely to stagnate in the future if they cannot make any drastic new improvements. When and before this happens, Apple's growth story is going to emanate from its other products. If you look at the individual products, iPad sales saw ~ 20% decline in Q415 and Mac saw a ~3% growth rate from Q414, which is ~17% decline from Mac sales between Q413-Q414.

Therefore, it is essential to shift the narrative to these declining segments. In the last 3-years, Mac sales have risen ~25%. If Apple can make the iPad more competitive with its peers, especially the Surface, and keep up the growth momentum in Mac sales, we could see strong growth from both iPad and Mac sales. These two segments account for ~30.3% of Apple's total sales. Therefore, growth in these areas would make the bull case for Apple even more compelling.

#10:Apple now holds $206 billion in cash, up 33% from last year. Companies with such cash piles have numerous advantages that all work out in the benefit of shareholders. Apple might consider buying itself a Tesla or buying back more stocks.

Using data from Morningstar, Apple's TTM EBITDA stands at $67.772 billion, TTM Net Income is $50.737 billion and its Market Capitalization is $680.2 billion. There are questions to consider here. Apple reported profits of $11 billion for the quarter on revenues of $51.5 billion. That is more than the combined profits of Google ($4.7 billion) and Microsoft ($5.8 billion) - two companies that are, by any standards, huge engines of profit.

Apple tops Forbes list of the 'World's Most Valuable Brands.' Yet, the world's most valuable brand trades at ~ 8.6X EBITDA and ~13X Earnings. Any time you are paying 13X earnings for the dominant player in the industry, growing margins at an average of ~35% in 5-years, with $206 billion in cash, with under-priced EPS growth rate and strong management - more often than not, the company is undervalued. Apple stock is a classic example of that under-pricing.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
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  • I do not have any business relationship with the companies mentioned in this post.
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