Unlocking the value in AAPL

“I have been giving a lot of thought lately to the stock market valuation of Apple. They are one of the most phenomenally successful companies in history yet investors collectively perceive their assets and earnings to be worth less than those of most other companies, certainly much less than those of most other successful companies,” Matthew Johnson writes for anandabits.

“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.”

Read more in the full article here.

24 Comments

  1. Sadly, Apple is slowly starting to look like GooSung. Many people are saying the 2010s decade is the new 1990s, because of the return of techno, boy bands, and cartoons that are ACTUALLY good (Regular Show, Adventure Time, etc). Looks like they need to add another thing to the list: Apple’s downfall. The only difference was that Steve Jobs came back in 97/98. Who will be leading in 2017-18?

      1. Unfortunately even if his critiques were completely reasonable, he would still get bad votes, because people don’t like to be told that something they love may need to make changes.

    1. This is a solid, well-referenced article. Johnson incorporates key insights from disruption theory but sticks to market basics to make his case. I want to believe he’s right in seeing a way that investors and analysts can arrive at a proper understanding of Apple’s new-fangled sustainability of revenue streams, which would result in their valuing AAPL more realistically.

      It’s

      1. …a shame Wall Street doesn’t yet see Apple as a reliable revenue stream, but if Johnson’s ideas gain currency—as they have done in the case of Carl Icahn, for example—sentiment will shift.

    2. The article is written from the point of view of investors, while the reality is that the stock price is manipulated by speculators.

      Investors understand the value of a forward thinking business model, but speculators are only interested in what they can squeeze out of the system in the next hour.

      The time has long passed when there is any meaningful linkage between the performance of the company and the performance of it’s shares.

  2. i still like what jony ive said recently, ‘”I would love, love, love to show you what we are working on now, but I’d lose my job.” – Jony Ive

    there’s no substitute for quality and visionary innovation. i’d love to have some of my own but i’m like most people …waiting to see what comes next ..how excited i’ll be when it arrives. don’t sound like the analysts and investors who need an iPhone arrival fix every cycle in order to believe. besides, look how secretive apple was about 64 bit. personally, i’m amazed how over this last decade, the itunes ecosystem with apple tv, etc. and iCloud has evolved to surprise everyone. looking back, it seems fairly logical but these guys are now probably looking out past the 2025. i’m glad they don’t give a flip about servicing wall streets every whim and cowering with every analyst’s threat to jettison their holdings. i’m just blathering.

    1. You’re voicing what many of us feel—amazement at how much our lives have changed in ten years, combined with shock at institutional forces so blind to it that they deny it can happen again.

      The market may need another few years, but they should wise up eventually. After they notice that Apple is still here. And kicking ass and taking names.

  3. Consider all the other high-quality (i.e., relatively high-priced) consumer firms that have come and gone. Most of them innovated, dominated the premium end of the market for a short time, and then sat on their butts while competitors slowly but surely picked away at them from the low end of the market on up.

    Apple — err, Jobs — may have had a surprising number of runaway hit products, but Apple itself has also demonstrated how fast the fall from power can be when a company does not grow and/or defend at least an equal stake with one’s primary competitors.

    Wall Street no longer compares Apple to Microsoft, and it doesn’t look at Apple as merely a US player anymore. Apple is perceived to have grown up and therefore be a world player.

    … but Apple is not a world player. Tim doesn’t think Apple needs to compete at modest price levels, which essentially keeps Apple from reaching 60% of the world’s population. That population will indeed purchase smartphones and tablets and computers, but if Apple refuses to offer a product they can afford, they will obviously choose the next best thing. That is why Wall Street loves Google and Samsung, but they question the leadership decisions that Cook & Co are making. It’s that simple.

    1. When I was in business for myself I learned that there are some customers you can’t afford to do business with. They want the lowest possible price, the least profitable products, and then demand the most service. You spend 90% of your time dealing with them and their price concerns, and they use 90% of your tech support resources. They want everything for free and spend as little money as possible on accessories or software. They make your life enormously complicated and prevent you from servicing those customers from whom you could make a decent profit. I believe in Apple’s model because of my first hand experiences with people who want the cheapest products available.

  4. AAPL is currently trading near $470. It’s P/E is under 12 and it’s dividend is around 2.6%.

    No need to “unlock value”, a weasel expression invented by hedge fund managers to line their own pockets at the expense of honest shareholders and loyal employees.

    Apple is in good hands. The latest announcements are both strategic and tactical. Markets, over time, will recognize this. The competition seems small in comparison.

  5. What is also discounted is the decreasing value of the US currency. Once that is looked at carefully with Apple’s sales overseas, I see more ‘dollar’ value than what is on Wall Street right now.

    The Fed is doing a tippy toe dance trying not to collapse the stock market by keeping up the “pumping”, but that can’t continue and that could yield a long collapse and some say a depression worse than what we have now. Given that we’ve had precedence with the 1930’s I won’t discount that.

    That said, I’ld rather own Apple during a downturn than say Nokia, Microsoft, Dell, HP or most any other public company.

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