Apple (AAPL, Financial) is a groundbreaking stock. It was the first company to be worth $1 trillion, and just this past week it took a giant loss – including loss of membership in the trillion dollar club. This was a bit of a shock, but with big earnings come the risk of major losses. And despite this recent earnings hit, the fact is that Apple is chronically undervalued. How did this happen with such a popular company?
Creative shortfalls
One reason Apple has always been so beloved is because of its creative advantage over competing tech companies, but since Steve Jobs’ death in 2011, the company hasn’t made any major design moves. In fact, many of the company’s recent choices – removing the iPhone’s headphone jack, and replacing it with the ridiculously easy-to-lose AirPods – have been viewed with derision by Apple loyalists. So while the iPhone continues to drive profits, Apple needs to recruit new creative minds to maintain its appeal and its value status.
Room for growth
Another element at play in terms of Apple’s valuation is the fact that the company, while actually highly priced, always has room for growth and has a sizeable cash hoard. These facts make Apple appealing to savvy investors like Warren Buffett, who boosted his stake in Apple to a nearly unprecedented $50 billion this past summer. Buffett has wisely assessed Apple as a value stock, a profitable contender despite its current challenges.
A reputation in conflict
Apple may be perennially popular in the general sense, but a closer look at the brand’s recent challenges, beyond the design aspects mentioned above, highlight some reasonable concerns. For example, one of the reasons Apple has always been so popular is because its devices were seen as less vulnerable to viruses. And for a time this was true. Unfortunately, in recent years, a whole set of Mac-specific viruses have cropped up, leaving users vulnerable. Though there are still fewer Mac viruses than viruses for Windows, their simple existence has left the Apple brand vulnerable to criticism.
Sales vulnerabilities
Finally, Apple’s persistent undervaluation is likely a reflection of its inconsistent sales. Most recently, the company missed its fiscal fourth-quarter iPhone sales estimates, leading to a 3% drop in its stock, and it’s expected that holiday sales won’t be enough to make up for that shortfall. This was despite record earnings, with a 20% revenue boost in the fourth quarter. In other words, Apple is undervalued, in large part because its investors expect so much of it.
With all this in mind, Apple is looking for alternative growth paths, which includes a new emphasis on augmented reality acquisitions. Recently, the company has bought at least 10 different small AR businesses, including TupleJump, PrimeSense and Akonia Holographics. Though not at the heart of Apple’s current business model, such a step forward could give it the competitive edge it needs to boost earnings and overall stock valuation.
Though most companies would be thrilled to be valued like Apple, even if it were being undercut, Apple could be doing better. It could still be part of the trillion-dollar club, and it likely will be again.
Disclosure: I do not own any of the stocks mentioned.
