Why Do Traders And Investors Underestimate Apple (AAPL) So Consistently

By: ispeculatornew
Date posted: 08.12.2011 (5:00 am) | Write a Comment  (2 Comments)

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It’s baffling really and I must admit that it’s one of those things that shows just how much I love the trading world. Since Steve Jobs returned to Apple (AAPL), the success story has been incredible with product launches that seemingly always go well and the nearly instant domination of the iPod, iPhone and iPad in their respective fields. Consumer satisfaction remains sky high despite going much more mainstream while business partners have mostly been loving working with Apple.

There is one area though where Apple has had a much more difficult time, it is with traders and investors. Sure, the company has finally emerged as the most valuable company in the world edging out Exxon (XOM) this week but it should have a lot easier. Have you known any other companies where analysts have been so consistently wrong about earnings estimates. Every single quarter for years, they have been dead wrong. Every single one of those times, their numbers came in much lower than what Apple (AAPL) actually did deliver. You would certainly think they would learn after being wrong so much, no? What am I missing here?

What about its stock price? Apple has also been cheap by almost any measure and its current P/E is much closer to the one of companies such as IBM (IBM) and Oracle (ORCL) despite its growth in recent years being several multiples higher. What in the world could explain this? I’m probably not the best candidate to find out as I have been going long Apple (AAPL) a lot, 3 times this year in fact and those have worked out well. Clearly, I’m not the guy who needs convincing. To be honest, I’m not even sure why I would try to convince anyone either. If one of the most known companies in the world can remain a bargain, I will not be complaining. I’ll just keep going long.

What Could Explain All Of This?

There are not a million different explanations. Here are my best guesses:

Slowing Growth: For a company the size of Apple, keeping up the growth in the high double digits will be a challenge and could be seen as impossible in many different ways. It’s much easier to grow sales by 50% when you have 2 or 3 hit products selling a few million per year. But as the sales grow, it becomes more difficult both in theory and in reality.

Counter argument: I would argue that even if sales do end up diminishing, they would still remain significantly high for a company trading at a 12 or a 15 P/E ratio. So I do not have much concern. Will growth slow? Yes, but it is already well priced into the stock’s current price.Also, while the Apple products have great market share in many parts of the world, many other areas such as China are seeing incredible growth and could help Apple keep high growth for several more years.

New Ideas?: Sure, the company led by Steve Jobs came up with the iPod, iPhone and iPad among other winning products. But how many more hits can it create? Is it possible for Apple to keep up innovating products even in an era where Steve Jobs might not be able to run things?

Counter Argument: I think it would be wrong to doubt Apple in this regard. There is already talk of an upcoming Apple TV and it would be crazy to assume that no other products are in the pipeline. Apple has been very good in keeping its newest products secret until the very last minute making sure that competitors are months and even years behind. That also means that analysts and investors generally have been unable to predict what comes next. I would expect this to still be the case today.

Lack Of Dividend: The fact that Apple has nearly $100 billion of cash and could potentially become the best dividend stock out there but refuses to pay out that cash to investors has been very frustrating for many shareholders. What is Apple accumulating all of this cash for is unclear but it certainly does not seem like it is the most efficient use from the shareholder perspective.

So what does this all mean? Honestly, I don’t see any reasonable explanation as to why Apple is priced so low and will continue to be long on the company led by Steve Jobs. Do you think I’m missing something?

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2 Comments

  1. Comment by Robert Zaleski — August 12, 2011 @ 5:38 pm

    I think the global growth is probably their strongest asset left. They very easily can become the international Coca-Cola of computers, the best that everyone lusts after like other brands. I mean they are the Yupi brand of choice, even though tech communities are decidedly split evenly 3 ways on that.

    The only flaw that makes me hesitant, is I don’t think they are growing who they sell to organically since the iPhone. I think PowerBook -> iPod -> iPhone -> iPad has been largely the same Yuppi group. And the PowerBook is certainly overpriced, which is why even though I have no fault with them, I’ve never put my own money down on one, or advised anyone to do the same.

    I do agree the integration they have is keeping them at least competitive if not giving them an edge in the iOs products, but the closed nature of the eco systems will always be a threat to ruin them. It caused them to lose the Mac platform as the defacto standard in the past when it could have been. And as these products become more ubiquitous, the limitations will continue to grow, I mean why can’t I download a podcast straight to my phone without iTunes, really?

    I think the bigger eye opener, is that many other companies must truly be under priced for Apple to be worth the most. I think it truly shows how under-invested and maybe even retail-driven the market has become.

  2. Comment by Ken — August 17, 2011 @ 11:07 am

    It’s “undervalued” primarily because of Steve Jobs health. Sad to say, he probably won’t last too much longer. After he passes away, the company will gradually decline. He is one of the world’s great inventors and is irreplaceable.

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