I’ve been pretty vocal about Apple (AAPL) in the past few years, mostly being very bullish which has served me very well. I did also make several picks involving Apple and generally did very well with it. Today however, I am taking a position which is much more meaningful. Those who follow this blog know that I divide my investments into a few different buckets, the main ones being:
–Retirement accounts: dividend focused stocks and ETF passive income strategy
–Long & short tech stocks (which I present here)
–Longer term speculative stocks
Today, I will be opening a position on Apple in that third category. What is the difference? This means I consider Apple to be grossly undervalued at this point and would argue that the upside potential is very significant compared to the downside. I take these picks very seriously because they are bigger bets with a long term focus. The last such bet I made was buying Facebook (FB) a bit below $20… which has been a good investment so far. I’m hoping to do as well with this one. I spent a significant amount of time looking at Apple’s data this weekend and here are some of the main reasons why I’m ready to finally jump in.
#1-Apple’s P/E Ratio Makes It A Great Play
Apple is currently trading at a P/E under 9. That is insane. Why is trading here? Wall Street hates companies/stocks that have decreasing growth which is understandable. I would argue that the hate has gone (way) too far this time around. Let’s look at other stocks that have comparable P/E’s:
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Let’s take a look at the growth in revenues and earnings per share over the past 3 years:
AAPL EPS Diluted Quarterly YoY Growth data by YCharts
AAPL Revenue Quarterly YoY Growth data by YCharts
Now… I have a few thoughts looking at these…. Apple is clearly the top pick in terms of revenues growth and while it’s seen some declines, continues to look solid in terms of EPS growth as well. So why is the company trading at such a discount to these other names? You might say that I picked names that would fit here. I didn’t. I’m more than happy to debate other names, ideally that have comparable P/E ratios to make the comparison easier.
#2-Apple’s Huge Cash Reserves
When I say that Apple has little downside at these levels, this is what I mean. Apple currently has a market cap of about $365B. That is significant. But consider the fact that Apple has about $140B in cash right now and is expected to move above $170B by the end of the year. So about half of its value is in cash with many other assets also having a lot of value. The company is (very) profitable, continues to grow sales so I don’t know how much lower the stock could go.
#3-Apple Is Paying Back Shareholders With Much More To Come
Apple already does pay out a 2.71% dividend yield and is likely to increase that or pay back some special dividends because cash is coming in much more than the company is able to spend it (good problem right?).
#4-Apple’s Product Line Will Continue To Do Well
Apple continues to have leading products such as its iPad and iPhone. The media often tries to make stories out of little about Apple but I don’t worry about these as much as some others. Why? First off, the iPad is dropping market share… That was expected of course as it started off with nearly 100%.. that was not going to hold but it continues to do well.
As for the iPhone? Yes, Android devices are doing extremely well and some phones produced by Samsung have produced decent competition for Apple. But if you look at this chart Asymco, you can see that Apple has actually out-gained Android phones in the past 12 months…thanks to in part to new corporate and government clients such as the Pentagon. So not, the iphone is not dying.
In addition, Apple has many other revenue sources such as its iTunes business that bring in consistent profits.
#5-Apple Will Come Up With New Products
Apple is rumored to be working on quite a few items which include a new Apple TV, iWatch, iRadio, etc. So yes, I’m confident that Apple will continue to do well for the medium to long term.
In the end, I simply think that the potential benefits greatly trump the risks of this trade…!
Disclaimer: Long Apple (AAPL) in a long & short trade