Zen and the Art of Apple's Valuation: A Qualitative Analysis

| About: Apple Inc. (AAPL)
The full title of that famous book is actually “Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values.” My theme is similar, but my inquiry is into valuations, specifically Apple’s (NASDAQ:AAPL).
The basic premise of that book begins with a simple question. Is it better to maintain your own motorcycle, or have a motorcycle mechanic maintain it for you?
If you hire the mechanic, you’re getting professional maintenance, but you’re a lot more disconnected from your motorcycle. If you maintain it yourself, you may not do as good a job, but you’re a lot more in tune with your own motorcycle. Substitute “portfolio” for “motorcycle” and there’s an interesting angle here.
In his piece on Apple’s valuation, Andy Zaky noted, “the only valuation metric that matters is what the market finds to be important. It's the market as a whole that determines the future value of Apple's or any other company's stock price.”
But the market as a whole isn’t always correct. And later in his piece Andy makes the case that Apple is undervalued.

So Apple is undervalued. It's undervalued and it's underpriced on a relatively basis. Investors have been paying significantly higher premiums to own other stocks than they have to own Apple. Investors would rather own Amazon.com (NASDAQ:AMZN) - a stock that has a much slower growth rate, reports less in revenue, less in income, less in EPS, has less cash on hand and trades at a bubble-type premium - than Apple which grows at a 100% a year and will have more cash than its entire $300 billion market cap within four and a half years.

Why would Apple be so undervalued? After all, a few weeks ago Gene Munster at Piper Jaffray “reiterated” his “overweight” rating on Apple with a $554 price target. Is the market stupid or smart?
You can’t say one way or another. But the market is doing what it’s supposed to be doing – being very disagreeable. It’s a trap to confuse price with value. Price is simply a yardstick Indeed, prices only exist specifically because we disagree on value. If there were no disagreement, prices wouldn’t need to exist.
So would you agree with Gene Munster on his $554 target? Or do you disagree? In reality, you and Gene probably disagree on the value of more things than you agree on – like your house, your car, a bottle of wine – well you get the idea.
Gene’s like a professional motorcycle mechanic – and probably a good one, but would you let him work on your motorcycle? You may have an entirely different approach to maintaining your portfolio – and your decision on Apple’s presence within it is a choice that’s part quantitative and part qualitative.
When Value Becomes Meaningless
Consider this thought experiment. At Seeking Alpha we have a vibrant community of people interested in dividend investing. What if we asked one of the more well-known contributors on the topic what they think Apple’s valuation is?
To a great extent, that would be a meaningless concept. Why? Because AAPL doesn’t pay a dividend. No I’m not trying to reignite the debate on the value of dividend stocks (I write about dividend investing regularly), nor whether Apple should pay one.
But you can’t deny that for any investor with the absolute requirement that a stock pay a dividend, Apple is not even in the universe of the investable stocks. And that’s a qualitative aspect of Apple’s valuation. You may find it irrelevant, but that doesn’t mean it doesn’t exist.
That kind of reminds of a trite old Henny Youngman joke, which I’ll rephrase.
Q: “How’s your stock?”
A: “Compared to what?”
The dividend investor is making comparisons on an entirely different set of criteria than you or I might. And that can work at the institutional level, too.
Taking a look at Apple’s largest investors, I note that the Fidelity Contrafund (FCNTX) held almost 16 million AAPL shares as of March 31. What if we find out that on June 30 it’s only 15 million shares? Do we conclude that the fund manager disagrees with Gene Munster on what Apple’s real valuation is?
Maybe. Perhaps the fund manager is getting bearish on Apple, but it could also be true that the fund manager has an eye on something else entirely. The Fidelity Contrafund happens to own some interesting emerging market banks. Maybe the fund manager is just itching to buy more of those – and is selling some Apple to do so.
And you know what? Gene Munster might actually agree with that move (although he wouldn’t say so wearing his official AAPL analyst hat, of course). After all, just because the motorcycle mechanic’s business is maintaining motorcycles doesn’t mean he won’t buy a car, a boat, or an airplane.
On a smaller scale, Apple’s valuation may reflect comparisons with things that aren’t even financial at all. I have a friend who sold Apple shares recently even though he agrees that the stock will likely move higher. I just happen to disagree with my friend on another issue. He would rather have a college education for his daughter than his AAPL shares. Me? I’m keeping my shares. (She’s smart, but her college education isn’t a basis for me to frame Apple’s valuation.)
Multiply decisions like these by the thousands and you end up with a price for Apple, but a whole bunch of disagreement on its valuation relative to everything else in this world. And with a stock like Apple, the disagreement can get exceedingly emotional.
And even though I’m making a distinction between price and value, even prices have a qualitative aspect to them – at least in my view. Which price has more quality – the sale of 10,000 shares held for 10 months, or the 10,000 shares held for 10 seconds?
I know that trying to shoehorn a qualitative component into how you might value a stock may be meaningless to you. But if you’re maintaining your own portfolio, your own motorcycle in a sense, you probably already have a gut feeling on Apple’s valuation in the long run.
As for me, I think Apple’s going higher. Why? Well, as the book Zen and the Art of Motorcycle Maintenance ends, “you can just sort of tell these things.”
Disclosure: I am long AAPL.