Apple (AAPL, Financial) is the world’s largest company with a market capitalization of nearly $575 billion. As the company gets bigger and bigger, the inevitable question of how much more they can grow arises. And with smartphone sales slowing down all over the world, Apple, the company that revolutionized our mobile world, is trading at an extremely unhappy 12.53 times earnings.
The valuation mismatch is even more evident if you compared Apple with some of the other large cap tech companies.
Source: Finviz
Apple’s valuation pales in comparison with other tech giants such as Google (GOOGL, Financial) and Microsoft (MSFT, Financial), and with a price to sale valuation of less than 3, the company is in line with Amazon (AMZN, Financial) and fares much worse than even Pfizer (PFE, Financial) and Johnson & Johnson (JNJ, Financial). It is clear that the company, with operating margins in excess of 30% with $233 billion in annual revenue, is valued at this level by the market.
Despite Warren Buffett (Trades, Portfolio)’s approval of the stock by way of adding to his position, one of the main reasons for such a valuation is, once again, the all important question: what is next? The innovation fountainhead of the tech world is yet to shock us with another product that shakes up the market like the original iPhone did. With every other iPhone since then being merely a fresh look at the same phone, Apple is starting to look like any other product company.
With the excitement factor around the company and its flagship product at the lowest levels ever, the stock’s valuation has gone from bad to worse and Apple looks extremely cheap at this price point.
The Mobile Operating System Moat
There is no other mobile operating system other than iOS and Android, for all practical purposes. Together they account for nearly 95% of the market and there is literally no room for anyone else. Apple, sitting at the high end of the smartphone market, holds 27.2% of the market share - less than half of Android’s 66.87%.
There is a reason why nobody else is able to compete with Google and Apple in this market. Microsoft, for all the money and talent it has at its disposal, for example, sees no way to increase their current single digit position. The reason is app developers. For any new player to come in and convince app developers to create applications for a new operating system is a huge task that is doomed to fail at every turn. First, there will be no market to generate any revenue for them. But that is not all.
Now let’s look at it from the other side. Businesses that develop mobile apps for themselves will obviously work on Android and iOS versions, but with only a fraction of customers on any other mobile OS, they would hesitate to spend thousands of dollars more just a cover a few more customers.
There is, of course, Tizen, but even that collaborative project from Samsung (XKRX:005930, Financial) holds a very tiny share of the smartphone market. For now, it seems everyone is gravitating towards Android - even Blackberry (BBRY, Financial) and Nokia (NOK, Financial).
Why is Apple Undervalued?
It looks like the market is pretty much closed for any new operator to make a dent. Apple’s iOS environment will ensure that iPhones, iPads and iPods sell for a really long time, even though the original appeal may fade away. With the iPhone 7 receiving tepid reviews at best, the media is already discussing the iPhone 8, which will come out next year on the 10th anniversary of the first generation iPhone.
The Apple community and the iOS world will keep the company secure for a really long time. Their growth rate may not be the same as it was before, but stable growth is definitely on the cards, especially with the company steadily expanding its services portfolio. Apple is extremely undervalued at the current price point despite being the world’s largest company.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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