By Michael Johnson
Apple's (AAPL) stock has been hammered since the beginning of September. Many analysts seem to be concerned that the company is finally showing signs of slowing growth after decade of absolutely crushing every estimate analysts put in front of it. I believe the market is correct in its assessment that Apple is no longer a growth stock; however, I believe that the market is irrationally pessimistic about Apple. Investors seem to have forgotten the fact that Apple generates enough profit in a single quarter to bailout Greece.
Apple may no longer be the growth story it once was and I understand the fears some investors have. Apple products are no longer as cool as they used to be. Tim Cook is not and never will be Steve Jobs. Apple's current idea of innovation is the iPhone mini and Google's (GOOG) looks like something out of a Stephen Spielberg movie.
Am I crazy for thinking Apple is a buy at $447? Maybe, but let's take a look at my thought process before anyone goes short on Apple .
Apple compares quite favorably to other tech heavyweights:
EPS Growth Past 5 Years (per annum)
Cash as a % of Market Cap
Apple screams buy from almost every valuation metric and I would argue that Apple is the most undervalued tech giant on the market right now. The current trailing P/E of 10 is a clear indication of the fact that investors are expecting a low-growth environment moving forward. However, I would make the same argument about other tech giants such as Microsoft, Cisco, and Oracle, which all appear to trade at significantly higher trailing P/E ratios, despite not really being considered growth stocks since the collapse of the tech bubble in 2000-2001.
Google is a great company and I think it has a decent shot of making the biggest contribution to the transportation industry since the Ford Model T, with its driverless car, but I have a difficult time paying nearly 25 times earnings for Google, when Apple is trading at less than half that.
Apple Is Not Microsoft
My main argument against that theory is that Apple is a zero growth company moving forward and that it has grown faster than all its major competitors over the last five years. Steve Jobs, the innovational genius behind Apple is unfortunately no longer with the company, however, I still believe it is still possible for Apple to achieve some level of growth moving forward. Microsoft lost a comparably innovative CEO in January of 2000, when Bill Gates resigned as CEO, and the company has done nothing but increase revenue and earnings. Unfortunately, the same thing cannot be said for the return on investment of Microsoft shareholders since that time, although I would blame an irrationally exuberant valuation by the tech-obsessed market during the tech bubble, rather than missteps by management. I think it is safe to say that with a trailing P/E of 10, Apple does not suffer from the same irrational exuberance Microsoft had in the first quarter of 2000, with a trailing P/E of 58.
Cash is King
A persisting concern among Apple shareholders over the last few years has been the company's growing stockpile of cash and the underutilization of it by management. I am among those who consider the company's cash surplus problem one of the better problems a company can have.
Hedge fund legend and activist investor, David Einhorn of Greenlight Capital has a solution, and is concerned enough about the company's cash surplus problem to launch a lawsuit against Apple, with the objective of forcing management to unlock shareholder value with its tremendous stockpile of cash. What really separates Apple from its peer group is its $137 billion pile of cash, which Einhorn says equates to $145 per share. An astonishing 32.3% of the current stock price is pure cash.
The plan calls for the issuance of what Einhorn is calling "iPrefs," which is essentially an attempt at a cooler name for preferred shares of the stock. The plan calls for one iPref to be issued with every share of common stock. The value of each iPref is to be $50 and will yield an annual dividend of 4%, or $2.
Einhorn claims that his iPref plan will unlock $150 in shareholder value and bring the stock back to the ballpark of $600. If the stock price goes back to $600 and each share of common stock is issued an iPref, which would represent 45.2% gain for investors who purchase at the current level $447. Einhorn would have among those most to gain from the iPref plan with his most recent 13F reporting that Greenlight Capital currently owns 1.3 million shares of Apple, with a value of close to $700 million.
The transition from growth stock to a blue-chip component of the S&P 500 is something all successful tech companies must deal with at some point or another. Let's face the facts. Apple had a great run, but it is at or it is approaching its critical mass. It is nearly impossible for a company whose market capitalization would make it the 28th-largest economy in the world if it were converted to GDP to continue to be a growth stock. At Apple's 52-week high of $705, its market capitalization was roughly equivalent to the size of Saudi Arabia's entire economy.
It is time people stop looking at Apple as a growth stock and embrace it for the cash cow it is. I recommend Apple as a buy over the next year, on a valuation basis.