- Apple is valued at a significant discount to relative peers Google, and yes, GE as well.
- Apple is discounted despite sporting better growth expectations and a nice dividend to boot.
- If Apple conveys its message more like Google and GE, I expect it could garner a valuation more like those two.
Remember the old television program, Electric Company (from Sesame Street)? Remember the skit, "Which one of these things is not like the others?" So you would naturally say GE (NYSE:GE) is not like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) right? After all, the latter two compete directly with one another. But that is not the point of comparison I am using. Rather, I say Apple is the unfortunate misfit of these three. My reason being: I believe its stock price inadequately accounts for the value of the underlying business, while each of the other two firms is fully priced. So, unfortunately, Apple is not like the others. Unlike at other times in Apple's history, this time that's a bad thing. I believe it can be corrected though and for big shareholder upside. Are you reading Mr. Icahn?
So I am certain you're wondering why I am even using General Electric here as a comparable. There are two reasons for it. First of all, I believe General Electric is a technology company at its core, and that it always has been. When GE first started making microwaves, for instance, they were revolutionary. When it made dishwashers, it represented a technology that was disruptive to the process of dish washing. We take these things for granted. I recalled the importance of its technological breakthrough a couple decades ago when I was vacationing in Greece and my frugal grandfather would not let me use the washing machine in order to save money on water. We had to wash our clothing with a washing board! I sure understood how for granted I had taken the technology of a washing machine that day.
Think back, if you can even remember the days when dishwashers did not exist, to the first time you used a dishwasher. Remember how awesome it felt and how cool the machine seemed? You had to have one because of how it changed your experience, and that is the essence of disruptive technology.
Today, General Electric is still revolutionizing things while it continues to also make those old tech appliances that changed grandma's life. Today, for instance, GE has its hands in 3D printing and all sorts of efforts to improve industrial machinery and processes. It's working on alternative energy technologies and revolutionary efforts in industries including energy, heavy industry, aviation, healthcare and beyond.
The company is technically a conglomerate, because it is involved in so many varied projects. Though, you will note that its current television commercial conveys a message of innovation and technology, which inspired my recent report entitled, How GE's TV Commercial Supports its Stock Price. It's required reading for readers of this report. It shows how GE teaches investors about what it does and what its stock is worth as a result of that. It offers a lesson to Apple and others, and you're welcome for the free consulting all you who are learning something today about the value of corporate communications.
5-Yr. Gr. Est.
- Closing prices from April 2, 2014 2:1 split adjusted for GOOG.
This table says it all. Apple trades at a deep discount to both Google and GE on all counts. Furthermore, it trades at that discount despite far better growth expectations than the other two and despite a significant dividend payout. The company's P/E is the measure closest marked to peer values, so when we use the P/E values of GOOG and GE to estimate how AAPL would be priced if valued like these two firms, we get a seemingly more realistic price target for AAPL. Even so, the difference is significant. However, when taking into account AAPL's superior growth outlook by using the PEG metric of these relative issues to calculate AAPL's value, we get an astronomical projected value for AAPL, with outstanding price appreciation potential. Now, GE pays a dividend obviously, and a better one than AAPL, so the estimated value when incorporating that dividend is less crazy. In all cases, we can see that if Apple were given more credit by investors for its efforts and expected efforts, it would be priced appreciably higher.
AAPL Price at GOOG Value
AAPL Price at GE Value
Average Projected Value
Projected AAPL Appreciation
Google and GE each close their fiscal year in December while Apple closes its out in September. This actually works to inflate Apple's valuation, given that its coming December quarter should be significantly more important than the prior year period, which is included in the estimate in its place. Any adjustment would serve to reduce Apple's valuation metrics even further. Though if we brought Google and GE back to match Apple's September year-end before using their valuation metrics to value Apple, we would get smaller price targets and less appreciation potential. Make no mistake about it though; both the target price and appreciation potential would still be astronomical in comparison to Apple's currently inadequate valuation.
So what's the problem then? Why isn't Apple valued more like Google and GE? I tapped into it once in my article, Apple Can Unlock 68% More Value by Emulating Google in this Way. What I've done with my GE write-up is to show how GE's valuation is enhanced by public relations and marketing work that influences the perception of the brand among people, including customers, investors and others. It informs investors who might otherwise overlook value in the company, and so it serves to separate GE shares from many of its rivals.
If you do something amazing, people have to know about it for them to give you credit for it. However stunning it may be, people are taking Apple for granted now, so it needs to remind us how great it is and how even more fantastic it will be in the future. In so doing, it will grab the value it deserves.
It's hard to imagine that Apple is even in this position, valued more like Microsoft (NASDAQ:MSFT) was before it began battling for ground in mobile. Imagine, even Microsoft is attaining a richer valuation than Apple today. Microsoft's P/E would be 14.6X if I have the freedom to average its June-end EPS estimates for 2014 and 2015 to get an estimate for a December 2014 close ($2.80). That would price AAPL at $624, if we applied the 14.6X multiple to the analysts' consensus estimate for Apple's fiscal 2014, giving it 15% upside just to be like MSFT… like Microsoft!
So what does Apple have to do then to get there? Judging by the flow of communications over the past few years, it seems to me that Tim Cook's team is getting the feel for what it will take! It must not only pursue new and exciting endeavors, but the company has to be something other than vague and confusing in its communications of those efforts. It's not cool anymore to sit up there atop the Cupertino hill and mumble something about something amazing, and then tell each other, they'll see when we release it. It's not cool, and it's not serving shareholders today, which is evident in the stock chart over the last few years.
It's kind of unbelievable that the innovator of our age is priced more like Whirlpool and not like GE in a pool of Whirlpools. So come on guys! Tell us more about the world changing payment system or the revolutionary television that manages the entire home. Otherwise, why shouldn't we keep bidding up Comcast (CMSCA) and Google instead of AAPL? After all, those two companies are telling us more about their plans to manage the home. Google is doing it with the help of its Nest acquisition. Apple's key competitor is also developing a driverless car system, Google Glass, and is pursuing a slew more cool initiatives. So despite the slower EPS growth forecast seen for Google, it gets a higher bid and richer valuation while Apple shares grow stale.
In closing, let me make it clear that I cannot do anything but view AAPL as a buy here at this bargain valuation, because it seems it should appreciate in value no matter what it does. And I do see the immense value in its current offerings, and I strongly believe it will benefit from the release of a new iPhone with a larger screen. It's just a question of what rate the stock appreciates and how much of its potential value it grabs as well, which has everything to do with its innovation and its communication, in my view.