I find Apple Inc. (NASDAQ:AAPL) stock to be providing a rare combination of value and growth. While the S&P 500 index has risen 30.2% since the beginning of 2013 and the Nasdaq Composite Index has risen 40%, AAPL stock has done nothing at the same period, only a 1.3% rise, but in my opinion, it has plenty of room to move up. Furthermore, Apple returns value to its shareholders through dividend payments and stock buybacks. In this article, I will explain why Apple stock is a remarkably promising long-term investment.
Apple has a market cap of about $481 billion, the largest among all the companies trading on U.S. markets, and its stock is extremely popular. 2,737 institutions are holding the stock, more than any other stock, and many individuals have put some of their money in this stock. We can get an idea of the popularity of the stock by checking Seeking Alpha's number of people who get real-time alerts on the stock; 231,071 in the case of AAPL, this compared to 131,952 on Google Inc. (NASDAQ:GOOG), 82,033 on Facebook, Inc. (NASDAQ:FB), 74,053 on Microsoft Corporation (NASDAQ:MSFT), and 59,089 people who get real-time alerts on Intel Corporation (NASDAQ:INTC).
An investor who considers buying the stock now and is looking for information and analysis about AAPL stock might be confused by the excessive information, most of it contradictory, and by the varied analyst opinions about the stock. On one hand, a new book "Haunted Empire", written by former Wall Street Journal reporter Yukari Iwatani Kane, offers a critical assessment of how Apple has fared in the years since the death of Steve Jobs. On the other hand, according to Carl Icahn, who owns 4.7 million AAPL shares, "Apple remains a no brainer as a long-term investment."
Analysts' opinion is deeply divided; among the fifty-two analysts covering the stock, fifteen rate it as a strong buy, twenty two rate it as a buy, thirteen rate it as a hold, one rates it as an underperform, and one analyst rates it as a sell.
According to Tip Ranks, a website which ranks analysts according to their performance, analysts are wrong 50.2% of the time. According to Tip Ranks, among the analysts covering AAPL stock, there are only seven who have the highest 5-Star rating, and all of them are recommending the stock.
On March 24, Pacific Crest's 5-Star analyst Andy Hargreaves reiterated an outperform rating on Apple stock, and a $635 price target, writing that his "checks" of component suppliers and carrier stores suggests "iPhone unit volume could exceed our estimates of 39.7 million in March and 33.6 million in June." Hargreaves thinks "replacement rates remain extremely strong and that Apple is gaining share of high-end customers."
Apple has recorded exceptionally strong revenue and EPS growth during the last five years. The average annual sales growth for the past five years was extremely high at 35.45%, and the average annual EPS growth for the past five years was unusually high at 42.44%, only Facebook among S&P 500 tech stocks has recorded combined stronger results; average sales growth of 96.02% and average EPS growth of 64.38%. According to Yahoo Finance, Apple's next financial year forward P/E is very low at 11.60, and the average annual earnings growth estimates for the next 5 years is very high at 21.28%, these give an extremely low PEG ratio of 0.55, only Lam Research (NASDAQ:LRCX) among S&P 500 tech stocks has a lower PEG ratio of 0.48 (see my article about Lam Research). The PEG Ratio - price/earnings to growth ratio - is a widely-used indicator of a stock's potential value. It is favored by many investors over the P/E ratio, because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Apple generates lots of cash, its price-to-free-cash-flow ratio is only 14.46, and it returns value to its shareholders through dividend payments and stock buybacks. The company ended the December 2013 quarter with $158.84 billion in cash, equivalents, and long-term investments, and $16.96 billion in long-term debt, or $142 billion in net cash. Apple returned $7.7 billion in cash to shareholders through dividends and share repurchases during the December quarter. AAPL's forward annual dividend yield is at 2.26% and the payout ratio only 29%.
Apple stock is ranked sixth among S&P 500 companies, according to Portfolio123's powerful ranking system "All-Stars: Buffett". This ranking system is based on investing principles of the well-known investor, Warren Buffett, and 15-years back-test has proved that this ranking system is extremely useful.
As a devoted user of Apple products; iPhone, iPad, and iTunes, I believe, in contrast to many doubters, that Apple has not lost its ability to grow, its products are the best in the market, and exciting new products will come out soon. In my opinion, it is now a rare opportunity for a long-term investment in such a great company at a remarkably cheap price.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.