I just read an article on Seeking Alpha discussing how Apple (NASDAQ:AAPL) is the most undervalued large-cap stock in America, along with about ten other bullish articles (today) that I received from various alerts talking about why, as an investor, you need to own AAPL stock immediately. Let me start by saying that I like AAPL a lot, and I own the stock. I have an iPhone (as does my wife), an iPad (as do my wife and eldest child), an iMac, a Macbook Pro and a Macbook Air. I use iTunes for music and I read books in iBooks (as does my wife, which is a big deal because she really likes the feel of a book so her conversion is an accomplishment). I think they are the best consumer-oriented company in the world, with nobody even close [compare them to Research In Motion (RIMM), a shining example of how an inept management can destroy a fabulous consumer brand and do nothing right on innovation for years, for example].
On an EV/EBITDA basis, at 4.9x 2012, the stock is clearly inexpensive relative to the S&P 500 (the aforementioned article has a lot of fancy graphs that explain the look-back on Apple and the current value proposition, so I won't address that here). Everyone sort of agrees that Apple is a cheap stock on the metrics. However, the more important question is why, despite incredible market attention for one of the largest market capitalization companies in the world, is AAPL trading at a discount to the S&P and cheap by most metrics? Because when you think about it, I think there are reasons the stock is valued where it is that nobody seems to talk about in the continued bullish euphoria of how one of the most well-held stocks in the market is cheap.
The Mac is expensive
The computer line of products are great. I love using a Mac. The software integrates well, and they don't get viruses. The old commercials were really good about how the Mac just worked. However, and this is important to note, I am typing this article on a Lenovo laptop (yes, as per the opening, I own a lot of technology). Why am I using a Lenovo? Because the Mac line doesn't work well with Bloomberg, and the Microsoft Office suite of products are much better on a Microsoft-based PC. Also, and this is kind of worth noting (sarcasm intended), a 15" Macbook Pro is $2,199 with standard features, whereas a similar Lenovo, top of the line computer, is $1,199.20. That is $1,000 less! For a computer!!! Now, I understand having a Mac is cooler, the software works better and that the share of the Mac has climbed in the PC-market. But as a Lenovo user, I can tell you: this is not a "bad" product, and Windows 7 is actually pretty good [heck, for a view on how Microsoft (NASDAQ:MSFT) is about to change the world and is going to compete going forward, read this article]. In a tough economy, spending $1,000 more for a brand is a lot, especially in a commodity product. I know, people are doing it. But will they forever, especially if Windows 8 hits (and so far, the product looks neat).
There are alternatives to the iPhone and the iPad
Whether it be the Android phones (and there are a lot, some of which are apparently very popular) or the new Amazon (NASDAQ:AMZN) Kindle Fire, there are viable alternatives emerging to the iPhone and the iPad. The recent iPhone 4S, which I have, is a great device, save the fact that the battery lasts about 8 minutes after the upgrade to 5.0.1 (which is relevant to point out because I have made fun of companies like RIMM for botching "tech" stuff on the release of a device, yet I do not read any finance writers talking about a less than stellar release for the 4S). I love my iPad too (and the battery works there), but the Kindle Fire is an ok device and is half the price (and from what I read, a lot of people bought from the Kindle Family this weekend). What I am trying to point out is that AAPL is, right now, dominating two other commodity driven markets (like the PC), getting people to pay extra for a mobile phone and tablet than they would otherwise, simply because the product is made by AAPL (and does work better for now). Like the PC, this is a tough treadmill to be on and thus, it is understandable that the multiple assigned to AAPL is not overzealous to reflect just how hard the company's core businesses are to remain the dominant player over the longer-term.
The ExxonMobil argument
Would you rather own AAPL, a fabulous consumer electronics company that dominates three of the hardest businesses to dominate globally, or ExxonMobil (NYSE:XOM), with massive reserves in oil and gas and an enormous base of retail and refining businesses that are necessary to facilitate movement throughout the global economy? AAPL trades at 4.9x next year (EV/EBITDA), and will definitely grow, assuming continued product innovation. XOM trades at 4.3x next year, and will, barring the collapse of energy prices, likely continue to grow over time as well behind production growth and other innovation in the energy patch. But thinking past next year, and to the future, what is a safer bet: that energy prices will be higher in ten years (supporting ownership of XOM shares) or that AAPL will be able to continue to maintain an innovation edge and charge consumers 2x and 3x for their products? Think about this for a minute, and then, considering the current valuation, decide what makes better long-term sense on valuation.
Everyone owns AAPL
Aside from this guy, AAPL is one of the most widely held stocks in the market (no, you can't quantify this, other than by noting that a company with a bit over $100 billion in revenues has a market capitalization 3x-4x companies that are 3x-4x larger, both in terms of revenue and profitability. AAPL is widely held, and thus, if anyone wanted to argue an efficient market, the valuation around AAPL is very much consistent with that as so many have voiced an opinion with capital invested. I could make an argument that AAPL will see multiple expansion in 2012 if the market goes up (on simple allocation math), and will see multiple compression in 2012 if the market goes down (again, as allocation dollars move away from equities, dollars will leave AAPL too, helping to support the super bearish argument on the stock). But this would be very hard to prove in a non-technical argument (and I am trying to stick to the fundamentals here). My only point is that in such a widely held stock, the premise of undervalued is a bit stretched, as everyone has an opinion and thus, the market has valued the business quite fairly.
So why do I own AAPL?
It is funny, in re-reading my own article, that I sound bearish on AAPL. But I am not (remember, I own the stock). I think AAPL should outperform the S&P because the company has a track record of superior innovation and with Siri (very cool, it will get better, and will serve as a bridge to capturing more markets in the home) as well as iTunes (which I think is vastly overlooked, as iTunes is the glue that holds all the products together, along with the new iCloud, in that the company is able to tie everything together better than anyone else which makes the products more attractive) that isn't there for the average S&P company (plus, AAPL is still really growing, and the cash balance is very nice and creates option value on a potential dividend). Plus, AAPL has not released a "new" product in a while (the Mac, iPhone and iPad, while getting better, aren't new) and the potential for something new and great could propel value for AAPL shareholders. The stock should outperform, now is a decent entry point because they might have some new areas of innovation in the pipeline, but I am realistic about it, in that I expect AAPL to do better than the market, but calling for some ridiculous valuation or claiming that the most widely held stock in the market is undervalued seems to require some perspective.
Disclosure: I am long AAPL.