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Why Apple Is Trading At A Discount To Its Intrinsic Value

|About: Apple Inc. (AAPL)


Recurring Revenue - Apple TV and Apple Music.

China Fears are Overblown.

The Power of Liquidity: Apple Has More Cash than Canada, Australia and Sweden Combined.

Apple (NASDAQ:AAPL) is down about 10% since its all-time high in May of 2015. This presents a significant opportunity for investors to buy Apple at a discount to its intrinsic value.

Recurring Revenue - Apple TV and Apple Music

Apple has forever been known as "the iPhone company." As of late, investors have been worried of the possibility of a slowdown in hardware sales, due to a recent report published by Credit Suisse, noting the possibility of a peak in iPhone sales as the maturing of the smartphone market begins. Let me assure you that your worries should be gone - Apple is no longer just "the iPhone company." With the introduction of new products and services like Apple TV, Apple Music and iPhone lease plans, combined with the efficient use of consumer loyalty amongst Apple products, Apple will be able to generate an entirely new stream of recurring revenue, which can be extremely valuable in the long run.

Apple TV, at a cost of about $39.99, coupled with the increasingly significant issue of cord-cutting and a shift to on-demand entertainment, will flourish amongst Apple's numerous products and services. Apple Music is an online-streaming service that will cost approximately $9.99 to the user. In addition, iPhone lease plans have been a huge success for Apple. Consumers now have the ability to constantly upgrade their hardware, while spreading out the financial burden over the period of time. iPhone lease plans also come with Apple Care, which protects against any manufacturing defects, hardware defects and accidental damages. The value of a recurring revenue stream has been proven time and time again by various broadband services companies like AT&T and Verizon. As Apple transitions from merely a hardware company, to a hardware and services company, Apple will be able to generate a sufficient magnitude of base monetization in addition to a recurring revenue stream. This can prove to be extremely valuable in the long run, as the average revenue per user (ARPU) can soar North of $100.

China Fears are Overblown

Investors have been worried about the possible slowdown in Chinese economic growth, and how that will affect Apple's ability to grow its bottom line. Let me just reiterate the issue at heart here: investors are worried that China will grow at only 4%-6% compared to the usual 9%-10%. At a growth rate of even 4%, China is still way ahead of the US. Now back to Apple: CEO Tim Cook noted in the most recent Q3 conference call that sales in the region "have accelerated" significantly. As Apple continues to grow overseas, the opportunity for bottom-line growth will continue to prove to be valuable for Apple in the long-term.

The Power of Liquidity: Apple Has More Cash than Canada, Australia and Sweden Combined

Apple recently announced that it now has over $200B in cash. The power of this cash is significantly valuable. In the most recent quarter, Apple spent over $4B in share buybacks and $3.1B in dividend payouts. Let's not forget that Apple's payout ratio is just around 20%, leaving significant room for growth in the case of a dividend hike. This pile of cash puts Apple in a position of power, as it has the ability to make acquisitions if Apple seeks to expand its growth even further. As Apple continues to generate significant cash flow, investors will continue to reap the benefits, from share buy-backs, dividend payouts and continued growth in acquisitions over the long-run.


Apple's ability to transition to a strategy of recurring revenue in addition to its base monetization from hardware will further stimulate growth moving forward. Apple's ability to expand significantly and quickly overseas will open up the doors to an entirely new growth market in the Asian region. And finally, Apple's ability to continue to generate unbelievably strong cash flow will continue to put Apple in a position of power, while investors sit back and reap the benefits. This will prove to be extremely valuable to Apple in the long run. At just 12x price-to-earnings and a PEG ratio of 0.33x, the market is not accounting for Apple's prospects for future growth. For these reasons, I believe Apple is trading a significant discount to its intrinsic value.

Disclosure: I am/we are 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.