How is Apple so cheap?

The biggest company in the world might also be very cheap

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

We Apple (Nasdaq: AAPL) bulls were sure enjoying our time in the sun in the first quarter. Despite seeing the broader market put up the best first-quarter performance since 1998, shares of the Mac maker still handily trounced both the S&P 500 and the Nasdaq Composite by rallying a jaw-dropping 45.8%. I'm leaving out the Dow because — well, frankly, because it's stupid.

It was the best of times
Apple outperformed the S&P by 35.5% and the Nasdaq by 29.1%. The first-quarter earnings report was the stuff that investors dream of: sales soared 73%, gross margin expanded by more than 6%, and net income more than doubled. Apple launched its third-generation iPad with 3 million unit sales and announced the initiation of a dividend. Times were good.

AAPL Chart
AAPL data by YCharts

It was the worst of times
Even as the second quarter kicked off, shares proceeded to reach an all-time high of US$644 in early April. Then the Apple bears took over the driver's seat. We're now about halfway through the second quarter.

AAPL Chart
AAPL data by YCharts

So far this quarter, shares have underperformed the broader market and given up some of the prior quarter's gains. After topping out at US$644, there was a prevailing sentiment that Apple might miss on iPhone unit sales, largely spawned from data coming out of domestic carriers AT&T (NYSE: T) and Verizon (NYSE: VZ), which put up ominous sequential drops in iPhone activations.

There was also concern that Qualcomm's (Nasdaq: QCOM) 28-nanometer supply constraints could hold back the next-generation iPhone because of Apple's use of Qualcomm basebands. There wouldn't be any immediate effect, though, since Apple doesn't currently use 28-nanometer parts.

Sorry, Apple bears. Wrong again.
The second-quarter earnings release largely allayed those fears, with Apple again smashing estimates. Shares popped 9% the following day to reach US$610. Fellow Fool Rick Munarriz astutely pointed out that despite the jump, Apple got cheaper thanks to its tremendous earnings growth.


Right Before Earnings

Right After Earnings

Price $560.28 $610
Trailing-12-month EPS $35.11 $41.01
P/E 15.96 14.87

Source: SEC filings.

Yup, looks cheaper to me. Since then, shares have now given back all of those gains and then some, making Apple even cheaper.

Fact: Apple is cheap
The low on Friday was US$528.66 (which is actually pretty darn close to the US$527 that one technical analyst predicted), or more than US$115 below the high. That's an 18% pullback, which turns into about US$107 billion in market cap lost.

It also translates into a P/E of 12.9. Apple's US$110.2 billion cash hoard turns out to about US$117.84 per share. Backing that out of that low gets you to US$410.82, or 10 times earnings ex-cash.

Analysts expect next year's earnings to come in at US$53.90 per share (and how often does Apple smash their collective best guesses?). So Apple is now trading around 7.6 times fiscal 2013's projected earnings ex-cash.

In comparison, the broader S&P 500 is trading at about 20.8 times earnings, and remember that Apple is the one driving a disproportionate amount of that earnings growth in the first place. Multiple analysts were out last month with gloomy calculations of what the S&P 500's earnings growth would look like if Apple didn't exist. For example, Ned Davis Research's Dan Sanborn's figures showed the market's earnings growth shrinks from 7.8% to just 2.7% without iEarnings.

That means that one of the biggest drivers of earnings growth in the market is currently cheaper than the market itself.

Sticks and stones may break my bones, but words can cost shareholders billions of dollars
The only explanation is that the bears don't think Apple's growth is sustainable. Some of the recent negative sentiment may be related to comments from bond fund guru Jeffrey Gundlach, who had some bearish comments at the Ira Sohn Conference in New York last week. Gundlach recommends shorting Apple and going long natural gas, saying that trade has "monster legs."

He doubts that people will line up around the block for the "iPad 87." Fortunately, that's 84 iPads away, and at one iPad update per year, Apple has plenty of time before it needs to cross that bridge.

In the Greenlight corner of this match we had equity hedge fund master David Einhorn, who backed Cupertino by saying:

I can't find any prohibitions on US$1 trillion market caps. I think the concern shows a fundamental misunderstanding of Apple because it assumes it is a hardware company. It's a software company. A consumer with one Apple product tends to want more Apple products. Once that happens, Apple has captured the customer.

Meanwhile, Einhorn's Greenlight Capital stood pat on its Apple stake of 1.5 million shares last quarter.

Looks like Gundlach is having his way as shares remain weak. I'd trust an equities guy over a bond guy when I'm looking at equities, but I guess that's just me.

Fill in the blank: Apple is cheaper than _______
As it stands, Apple is absurdly cheap. Cheaper than mobile rival Google (Nasdaq: GOOG), which trades at 18.9 times earnings with earnings growth of just 28.1%, while Apple trades at 12.9 times earnings with earnings growth of 95.5%. Beyond earnings, it trades at 11.1 times free cash flow compared with Google's 15.9 multiple. It's cheaper than the S&P 500. It's cheaper than the Nasdaq Composite.

It's just downright cheap. Here's where the whole "buy low" bit comes into play.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Evan Niu, originally appeared on

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »