iPhones and iPad devices are sweeping through households the world over, entertaining millions and reshaping the technology landscape in their wake. Now the company who started this sea change years ago, Apple Inc. (NASDAQ:AAPL), remains virtually unchallenged at the top of Silicon Valley. Yet despite this impressive performance, shares of AAPL stock get about as much respect as an oil executive at a Greenpeace convention. In the last six months, Apple stock has posted an uninspiring -7.6% return, underperforming not only the flagging market as a whole but also most of its rivals:
|Company||6-Month Price Change||Trailing P/E Ratio|
|Source: Google Finance|
While several of the companies above look like attractive investment candidates, not one can match the opportunity I see in Apple stock right now. Let me show you three things that Mr. Market seems to have forgotten when it comes to AAPL stock’s value.
Mr. Market Forgot About Apple’s Stock Buybacks
Tim Cook has made one thing absolutely clear: Apple is not ditching its share buyback program anytime soon. Management continues to allocate the majority of its capital return program toward share repurchases. The most recent increase brought the total program to $200 billion, of which $140 billion is set aside for share repurchases. (Source: “Apple Expands Capital Return Program to $200 Billion,” Apple Investor Relations, April 27, 2015.)
That’s a powerful vote of confidence in AAPL stock to say the least. In fact, Apple is gobbling up its own stock so fast, earnings per share growth continues to outpace revenue by a healthy clip. Last quarter, diluted EPS jumped 38% while revenue increased 22%.
Mr. Market Forgot About Innovation
Apple stock is cheap, but even the chart above underestimates just how inexpensive shares are compared to peers. Today, AAPL stock is trading at around 12.9 times trailing earnings, but the company is sitting on over $206.0 billion in cash on its balance sheet. If we back that out, Apple trades at just 8.9 times earnings ex-cash.
How many over stocks can you buy for under 10 times profits that offer 30%+ earnings per share growth? You could almost think of Apple stock as a “free option” on future innovation. Because you’re only paying for the current business, Mr. Market is throwing in all future inventions that might come out of Cupertino, California for free!
Mr. Market Forgot About Moats
Why does Apple stock trade at such a discount? Mr. Market probably views Apple as a traditional technology company. Sure, Apple can command respectable margins for a few years. But once rivals catch up to the company’s innovations, profits will dry up.
However, Mr. Market has failed to appreciate Apple’s competitive moat, which protects the company’s margins from attackers. Of course, the Apple brand name is the company’s best-known asset, as evidenced by customers willing to endure long waits to get their hands on whatever product Apple is rolling out. However, Apple’s real competitive advantage is its ecosystem. A collection of tools and applications that keep user cemented in the Apple family of products.
Bottom line, Mr. Market is still wrong on Apple stock. Now is not the time to be betting against the company.