I write about value-oriented stock investments. My "universe" is the set of stocks screened by Joel Greenblatt's Magic Formula® Investing (NASDAQ:MFI) technique, which includes only some of the cheapest stocks in the market against their trailing earnings.
So you can imagine my surprise and intrigue when Apple (NASDAQ:AAPL), one of the great growth stories of the 21st century, recently appeared - and stayed - on those screens.
This is no fluke screening, either. The strategy uses EBIT/Enterprise Value earnings yield (EBIT/EV) instead of P/E ratio to value stocks, essentially rewarding a company for a lot of cash and penalizing for a lot of debt. When you remove Apple's net $97 billion in cash and investments, you get an earnings yield of 12.5% on the stock. To put that in a number comparable to the P/E ratio, that's about 8.0.
For perspective, the average market P/E ratio is about 14. Apple's EBIT/EV is exactly the same as its long time competitor, Microsoft (NASDAQ:MSFT). The big difference is, in the most recent quarter, Apple generated 73% revenue growth to Microsoft's 4%!
There's only one explanation for this growth-vs-valuation dichotomy - the market must think Apple's growth story is about to hit a wall, or even reverse entirely. After all, a company growing this fast with over $125 billion in revenues is bound to flat line sooner or later, right? And there is always Apple's notorious history hanging over the stock, particularly with legendary CEO Steve Jobs passing away last year.
To the contrary, I believe Apple has plenty of growth catalysts left, even at its current lofty revenue and profitability levels. Consider these 5 growth avenues for the next year:
1) The Bulk of Revenue Comes From 2 Rapidly Growing Product Categories
In Q4, 70% of Apple's revenue was driven from the iPhone (smartphones) and iPad (tablets). These are two markets expected to grow at 20% and 60%, respectively, in 2012. Apple's respective market share is around 30% and 90% in those two markets. So, even if Apple just held serve on market share, there is significant underlying organic growth to capture going forward.
2) The iPhone Just Launched in China
China is the world's largest mobile phone market, and just recently became its largest smartphone market. But guess what? Apple just started selling the iPhone there last month! It even had to bedelayed at some stores in January due to huge and unruly crowds. iPhone moved 93 million units in 2011 (double 2010), and China demand alone could increase that by 50%.
3) 2012 Should Be A Big Product Refresh Year
Through the 5 generations of iPhone, Apple has established a yearly cadence of big update, small update. 2011's iPhone 4S was a rather small update on the existing iPhone 4 - and still led to gigantic sales. 2012's iPhone 5 is expected to be a bigger leap forward, which should drive even bigger upgrade, new, and switcher sales. The same holds true for the iPad 3, an announcement on which could come within the next month.
4) Mac Has Tremendous Momentum and Tremendous Room to Grow
A less-talked about data point from Q4 was the Mac's 26% unit growth. Compare that to overall PC sales, which declined 1.4%. Mac has been outgrowing the PC for about 6 consecutive years now. Yet, worldwide, Mac's share of the overall PC market is still a rather miniscule 6.5%. This leaves plenty of growth ramp, particularly in international consumer, business, and education.
5) New Product Categories are the Firm's Bread and Butter
Something Apple does better than any other consumer electronics company is extending its ecosystem into new product categories. With an established way to sell and deliver music, movies, apps, and books, as well as a cloud data syncing system in place, Apple could easily extend its design expertise into new consumer electronics. Big screen televisions, console gaming, and digital photography are three large markets the company could conceivably enter for growth.Disclosure: Steve owns AAPL
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Disclosure: I am long AAPL.