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Still Hesitating About Apple (AAPL)? Let Me Get This Straight

March 13, 2014 | About:
Investing Caffeine

Intelligent Speculator

6 followers

I’ve written a few times about Apple recently and as you probably know, hold a decent stake (from my perspective) in the company. At this point, I’m strongly considering adding to that stake. There is no such thing as “free money”, especially in the stock market. But what I always look for is the opportunity to find stocks that have a great risk vs reward ratio. In this case, I have to agree with Carl Icahn in the sense that it’s a no-brainer. I do understand that Apple is not as “cool” these days but if you look at the fundamentals, I’d have a hard time thinking someone could argue against it.

Apple’s Assets: I’ll obviously get to the actual business soon but just want to start by looking at the cash and cash equivalents. Apple owns about $147B of cash as of the end of February. That amounts to approximately $165 per share. I think we’d all agree that it is significant.

Apple’s Current Business: Apple has a tremendous customer base that has been growing for several years now. It has lost market share in the smartphone market but that is mostly due to the segregation in the smartphone market. In the high end market, Apple stands alone with Samsung and the recent launch of the Samsung Galaxy 5 was good news for AAPL shareholders as it failed to deliver innovative features. iPhone sales continue to increase.

iphone

credit: Asymco

Apple is also the dominant player in the tablet market, establishing a similar pattern to what it did with the iphone

One flaw that is often (but not often enough) pointed out when looking at Apple’s market share is its overall strategy. It only targets the high end of the market which does mean that as the market’s reach increases, Apple’s market share decreases. That is not something that Apple focuses on nor should it in my opinion. The lion share of apps spending continues to be on iOS devices confirming the higher relative value of iOS customers. To compare the value of an “average” Android customer with an “average” iOS customer is a big mistake.

I’ve also made my case for Apple’s lock-in effect being incredibly effective on SeekingAlpha which I highly encourage you to take a look at:

The Ecosystems Play Is Expanding, Which Is Bullish For Apple

Apple’s Earnings

How do those sales affect the top and bottom lines? Despite Apple’s size (the highest valued company in the world), the growth continues to be rather strong when you consider where Apple is being priced (P/E of 13).

Apple is thus trading a bit over $500 with a third of that value is held in cash while Apple continues to generate roughly 9% of that value in earnings every single quarter. This is not for a dying a stable business but one that is growing.

Upcoming Products

Do you think that’s the end of my case? Apple has teamed up with the vast majority of world car makers which will be integrating Car Play into their cars in the coming months. That will add to the sales, revenues and lock-in effect. Apple is also planning a similar move with the iWatch which

What’s Being Ignored

Many of Apple’s assets are not event being accounted for when valuing Apple because it is mostly seen as a company that makes money by selling devices:

-iTunes: Apple’s digital sales are significant and growing quickly as the company continues to act as a middle agent for apps, music, movies, tv shows, etc. This segment now accounts for close to $5B/quarter. When you think about companies that have paying customers, we tend to think about Amazon but Apple also has several hundred million paying members.

-iAds: Apple has one of the top mobile ad networks

-Messenger: For all of the talk about Facebook’s (FB) $19B acquisition of WhatsApp and its 450 million members, it’s easy to forget that Apple has many more messenger users

-Apps such as maps: When you look at Apple’s maps for example, it’s easy to overlook when comparing with competitors such as Google just how good and valuable of an asset that is. With Apple soon to be connecting millions of cars (and thus accumulating all kinds of data), those maps are sure to improve quickly.

So Is It Just Me?

How in the world can Apple be trading at a P/E of 13? It continues to look like a great trade…moderately high potential upside, very limited downside!

Disclaimer: Long Apple ()


Rating: 4.0/5 (1 vote)

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Comments

jopocop
Jopocop - 6 months ago

Apple is suffering from the Blackberry Fear, that is, Apple is being attacked by Google, Lenovo, Samsung, HTC, BBRY, LG, Xiaomi, Huawei, ZTE, ALU, Jolla, Nokia, MSFT, Firefox, Ubuntu, and many smaller players in China and India. That is, over time, it is Apple against the armies of competitors, which will push down margins and device selling prices. Apple was the king of smartphones in 2010 to 2011, but then 2012 the pounding took its toll. The SP collapsed after iPhone5 was released in Sept 2012, and Apple could not get them built and sold fast enough to meet the demand. People bought competitors instead. The other fear is regarding Telcos stopping subsidies. Meanwhile, goog is the darling now, as it is comgomerating into so many tech world projects, while Apple is watching from the sidelines. The iWatch will not be out until later this year, and will it be a hit? Will there be an AppleTV? No AppleGlasses. What other Apple Wearables? So, the unknowns and fears over the competitors is putting a drag on buyers taking control. People are worried about the April Conf Call, that maybe there is a miss coming up. Would love to see Apple go back to his highs at $700, but, right now, too many fears or lack of confidence for many.

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