5 Reasons Apple Is Currently Cheap

Jan.25.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) performance over the past five years can be described as none other than spectacular, and the news keeps getting better. On Thursday, Apple reported first quarter earnings (excluding items) of $13.84 per share. A year ago, AAPL was delivering $6.37 per share. This is a doubling of quarterly earnings in only one year. This level of success is unparalleled, but that is not why AAPL is such a hot stock to own. The reasons lie in the fundamentals that illustrate that not only is AAPL performing well now, but also that AAPL is poised to continue to gain market share, build new products, and bring down competitors.

Here Are Five Reasons AAPL is Currently Cheap:

1. Cash Reserves: In business, money is king but in tech, people are. The ideas that flow through Silicon Valley are what allow AAPL to continue to innovate and lead the pack in regards to performance. What allow these ideas to be born are the capital reserves that AAPL is currently holding of $97.5 billion. This level of cash on hand will allow AAPL to create new products, but from an investor prospective makes the stock one of the safest in the world.

Ben Hopper from Venture Beat stated that "Apple can afford to fight this battle as well or better than any other company." Hopper goes on to question whether AAPL is utilizing its capital. When AAPL does, their largest rivals Google (NASDAQ:GOOG) and MSFT should prepare for losing more market share. As a reference, Microsoft (NASDAQ:MSFT) has half of AAPL's current cash-reserves on hand. This differential yields long-term stockholder stability: something everyone wants.

2. Market Position: One of the greatest attributes of AAPL is that it still doesn't have the market share of MSFT in computers or Google in mobile devices. This provides an exceptional opportunity for growth, even if some believe their fire is bound to run out. It is reported that AAPL has 10.7% (see graph below) of the personal computer market and roughly 28.7% of the smartphone market. Analysts have stated recently that MSFT is not likely to be able to build a great mobile device.

This type of sentiment makes AAPL even more attractive because the barrier to entry in the smartphone sector is so difficult. If AAPL's largest competitor, MSFT, is unable to break into that market, AAPL's growth prospects elevate. With the level of cash mentioned above, AAPL is in a phenomenal position to grow to new heights.

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(Apple US Market Share Trend: 1Q06-2Q11)

3. PEG Ratio: A company's price/earnings to growth ratio is a foolproof way to measure how a stock is valued. Many believe that because AAPL is trading at $450 per share that it must be overvalued and that the stock price must be built upon hype. This is simply not true in the case of AAPL. Currently, AAPL has a forward PEG ration of .57. To put this in perspective, MSFT's PEG is 1.15 and AAPL's is .82. This differential shows that compared to its largest tech rivals, it is undervalued and could easily soar above $500.

  • Low Valuation: This PEG ratio points to AAPL being undervalued, trading at 11.7 times earnings.

4. Promise of Ideas: Tim Cook, successor to the late Steve Jobs, stated at the company's earnings reslease: "We're thrilled with our outstanding results and record-breaking sales of iPhones, iPads and Macs… "Apple's momentum is incredibly strong, and we have some amazing new products in the pipeline." AAPL is not a company to come out and say that new products are on their way when they are not. Traditionally, AAPL has set relatively low expectations for itself and outperformed earnings and expectations (evidence by Thursday's results.) This statement by Cook should not be taken lightly and should be an indication of future innovation. Even without a new product line, AAPL is in an exceptional market position.

5. Perception Becomes Reality: If it is unthinkable that AAPL could gain any more momentum, think again. Howard Silverblatt, a S&P's senior index analyst, estimated on Tuesday that AAPL's market cap could open today at $427.5 billion, placing it as the largest company in the United States. Many may see this as a point to take a step back because AAPL has preformed so well, but this is not true. When John D. Rockefeller formed the Standard Oil Company in 1870, no one would have thought that today it would consist of several companies with a total value of nearly $1 trillion. This momentum makes AAPL growth and future success imminent because individuals and businesses from around the world will catch on to the rise of AAPL if they haven't already. This will further perpetuate the cycle of AAPL taking over the top stop in nearly all computing devices.

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Conclusion: For the multitude of reasons aforementioned, AAPL is in a position to continue to grow and gain market share, cash reserves, and maintain long-term stability. If AAPL begins trading at its proper valuation, the stock will rise dramatically, and $500 shares of AAPL may just seem reasonable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.