Why AAPL’s Trading at a Discount
Apple Inc. (NASDAQ:AAPL) is one of the most successful in the world, yet analysts have been downgrading the stock in recent months. However, the tide is turning and there’s an opportunity to make a boatload of cash on AAPL stock, but it’s a very short window.
The company happens to be trading at a steep discount because it’s been consistently oversold. Those dips in sentiment are always short lived.
If you look at Apple’s growth in profits and the sheer size of its revenue, I really don’t understand how anyone can be bearish on this company. It’s not like Apple is Amazon.com, Inc., which churned out loss after loss while seeing its share price soar.
I don’t agree with the criticisms of Amazon—personally I think it’s an incredible company—but I understand where they’re coming from. On the rare occasion Amazon managed to squeeze out a profit, its stock price was still hundreds of times higher.
At last count, Amazon’s price-to-earnings (P/E) ratio was sitting at a whopping 474.9. It’s understandable to think the company’s earnings could never catch up to that kind of valuation, so the criticism is legitimate. But Apple’s price-to-earnings is only 11.6.
This is an abominably low valuation for a company that produced record profits in its most recent quarter. It’s even lower than the industry-wide P/E ratio. This means that investors think Apple is going to underperform the market during 2016!
How in the heck can anyone reasonably believe such a thing? Seriously, we’re talking about a company that earned $18.4 billion on $78.9 billion in revenue last quarter. Not only did it reach record-high profits, but it also did so with a 42.7% return on equity. (Source: “Apple Inc. Form 10-K Filing,” Securities & Exchange Commission, January 27, 2016.)
Unless investors believe that number is going to suddenly crumble in 2016, I don’t see how they can justify such a staggeringly weak valuation for AAPL stock. But every smart investor should be open to the possibility they are wrong.
After all, the market is right more often than it’s wrong. Spotting a mispricing that you can exploit is damn near impossible, so we should at least consider the alternative.
I’ve listened to everything the bears have said and it seems like their entire argument boils down to one point: Apple can’t continue to finance its growth from “iPhone” sales.
The bears think the smartphone market has reached peak saturation. I’m not saying that’s a crazy argument, because it isn’t. But for Apple stock to have fallen by 13% in a year means the bears think the company will suffer material damage in 2016.
And that’s where they lose me. Apple has made significant investments in music streaming, video streaming, and wearable technology. It’s starting to see some of those bets pay off, particularly “Apple Music.” Considering that its investments are doing well, and that people are going to keep buying iPhones, the firm seems to be in great shape.
Expectations are so low right now that AAPL stock could skyrocket just by matching its performance from last year. It doesn’t even need to grow; Apple just needs to stay on track. After that point, AAPL stock could soar and expectations will likely normalize.