“This has been a persistent mystery for many in the Apple community,” Johnson writes. “Even the boldly confident Jim Cramer sounds puzzled when he says ‘This has gotta be the single most controversial stock I’ve ever seen in my career.’”
“Financial markets currently value Apple at roughly 3x cash, roughly 11x earnings, and roughly 8x earnings if you remove cash from the valuation. This compares to a current S&P 500 valuation of about 19x earnings and a historical average S&P of about 15x earnings. Most companies in the S&P 500 do not have net liquid assets sufficient to impact overall valuation materially in the way Apple does,” Johnson writes. “The S&P valuation is a reasonable proxy of fair market value for a stable, mature business expected to grow modestly (in line with the economy). By these measures, a fair value for Apple as a stable, mature business with modest growth expectations is somewhere between 50-100% higher than its current valuation. This is what Carl Icahn means when he says Apple is significantly undervalued.”
“Clearly Apple is trading at a significant discount to the value it would be given if the market believed the stability of Apple’s future business was reasonably assured,” Johnson writes. “The question is why? Why does the market seem to doubt Apple’s ability to sustain the business they have built?”
Johnson writes, “I believe I have ‘cracked’ the mystery behind Apple’s current valuation as well as what will need to happen for Apple to receive a valuation more in-line with the success of their business.”
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