Rational thought is beginning to take shape again as investors try to pin down a fair value for shares of Apple (AAPL) stock. A price below $400 just weeks ago made little sense for a company with $150 per share in net cash and $40 per share of net earnings (P/E ratio ~ 6x). With the stock back above $450 as the newly announced (and massive) share repurchase program commences, where is Apple likely to trade? This is not an easy question to answer, as the bears think it should trade at a multiple more in line with Microsoft (MSFT), while the bulls could argue that Google (GOOG) is a better comparable. Since Google trades at double the valuation of Microsoft (I am using trailing 12 months cash flow multiples in this article), fair value assessments can vary greatly based on your assumptions.
To put this debate in perspective, I thought it would be helpful to determine what price Apple stock would fetch if it traded in line with every other large-cap tech stock. For this exercise, I included only U.S. listed technology and telecommunications companies with equity market values in excess of $100 billion (the truly "mega-cap" names). I excluded Amazon (AMZN) because its valuation is an extreme outlier and would just cloud the data. (Case in point: If Apple traded at 41 times cash flow like Amazon does, the stock would be at an astounding price of $3,900 per share.) The resulting group consists of 10 companies, in addition to Apple, to use as a comparative group.
The table below shows the entire group of 11 mega-cap tech companies, along with their current trailing 12 months cash flow multiples. The last column, labeled "AAPL FV," shows what fair value for Apple stock would be if it was valued at the same level as each company on the list, in ascending order.
As you can see, even after a nearly 20% rise from the bottom just a few weeks ago, Apple remains the cheapest large-cap tech stock around. The share price would need to rise about 10% from here just for it to tie Intel as the next cheapest of the group. With many slower growing companies on this list, we can see that an argument that Apple is worth $600-$800 per share is not very hard to make when comparing the stock to its peers.
The debate over fair value for Apple shares is unlikely to dissipate or be resolved anytime soon, but hopefully this chart helps investors see the bigger picture. Personally, I think the data further supports the view that the risk/reward tradeoff in Apple stock at current levels is compelling, and that over the intermediate to longer term a return to its previous high of $700-plus is not only just plausible, but likely.