Apple: The Most Undervalued Large-Cap Stock in America

Sunday, November 27, 2011 -- In light of the recent sell-off in global equities, it is now an incontestable FACT that Apple is the most undervalued and underappreciated large-cap growth company in America. The stock trades at an extremely depressed valuation that Wall Street isn’t taking seriously (8.25 Forward P/E Ratio), the company’s growth continues to outpace every large cap company on the entire S&P 500, and the company’s growth rate percentage – defying all laws of gravity – continues to accelerate without any sign of abating.

Every quarter that goes by, Apple reports another multi-year record high growth rate that continues to be brushed aside and overlooked by investors. Apple’s stock performance relative to its valuation and fundamentals, and relative to other companies with lower growth rates and more expensive valuations is completely abysmal.

In its recently reported fiscal Q3 2011, for example, Apple reported a 6-year record-high growth rate of 121.94%. Yet, one would never know this by listening to CNBC, Bloomberg or reading the average article from The or Business Insider. Instead, the only stories you will see are ones that don’t really matter in the grand scheme of things.

For example, instead of pointing out how the company reported 122% earnings growth in fiscal Q3 or the fact that the company trades at a 13 P/E ratio, CNBC is quick to point out how iPod sales – an operating segment that makes up only 4% of Apple’s total revenue – is slowing. Nevermind the fact that iPhone sales grew over 140% -- four times the smartphone market -- from 8 million units to 20 million units in fiscal Q3 or the fact that Apple’s revenue has almost tripled in 2-years.

Stop the presses because iPod sales which produces less in revenue than iTunes is now slowing. And it wouldn’t be so bad if the press merely only reported these inconsequential facts. But it’s not just that. It’s the highly misleading and faulty conclusions drawn from these inconsequential facts that has been so damaging for the stock over the years. If it isn’t the Zune iPod killer, or the Android iPhone Killer, then it’s the Amazon Kindle Fire iPad Killer which amounts to nothing less than the obvious end of Apple. Forget about reporting the actual facts or the news, everything is now editorialized.

No one cares to report that iPhone sales outpaced the market by 400% or how extraordinary it is for a company of Apple's size to see accelerated revenue growth of 66% leading to sales of $108 billion in 2011. Or that you would have to go back to 2004 when Apple was reporting less than $1.00 in EPS to find a year with a higher EPS growth than the 82.71% Apple recorded in 2011. True story. See below.

There seems to be an ever-present sentiment-war being waged against Apple as it is constantly hit from all sides in a very concerted way. And this is not something new. It’s been going on for years with Apple. With the recent passing of Steve Jobs, it has only gotten much much worse. I’m here to try and balance the scales a little by reminding everyone about the simple truth concerning Apple. While the company’s earnings have absolutely skyrocketed since 2008, to the dismay of investors and to the delight of Business Insider, the stock has gone nowhere.

In late 2007, Apple traded at $200 a share after reporting $3.93 in EPS on $24.5 billion in revenue. Turn the pages to 2011 and it’s an entirely different company. In just four-years, Apple’s earnings have grown 600% to $27.68, and its revenue skyrocketed 341% to $108.2 billion. That’s the most explosive 4-year growth rate of any large-cap company on the entire S&P 500.

Yet, one wouldn’t know this given the stock's very sluggish performance, extremely depressed valuation and the media’s permanently negative sentiment on the stock over the past few years. The stock is now trading at an extremely low 13.1 trailing P/E ratio. We’re talking about a valuation level that Apple hasn’t seen in nearly a decade – this despite the fact that the company grew its earnings 82% this year which is the highest in over 7 years. We’re talking about a valuation that is more than 10% lower than the lowest point during the financial crisis. See below:

And even though Apple has grown its earnings by 600% in four years, the stock has only risen 81%. And while 81% might seem like a lot, just remember that the company is essentially 7x larger than it was in 2007. Apple has also grown its balance sheet 5-fold since that time and its cash has also risen 5-fold. You would expect to see at least a 200-300% move in the stock, and if history repeats itself, you soon will.

The chart below should give you an idea of how poorly Apple has performed relative to its growth. On the first day of 2008, Apple traded at $200.50 a share. It had $3.93 of earnings under its belt at the time. Today, the company has $27.68 in earnings and only trades at $363.57 (as of Friday) which is merely 81.3% higher. This versus the 600% in earnings growth over the same period.

The company’s earnings growth accelerated dramatically in 2011 as it reported an 82.7% earnings growth rate. Yet, apparently an 82.7% earnings growth rate isn’t good enough to give Apple a valuation that is higher than Cisco’s (CSCO) 15.11 P/E ratio (earnings contracted in 2011), Oracle’s (ORCL) 16.35 P/E ratio (less than half of Apple’s earnings growth) or Google’s 19.19 P/E ratio (grew 15% this year).

Over the past year, Apple has been taken to the woodshed on every sell-off in the market. It also significantly underperformed the S&P 500 on the entire QE2 melt-up rally between October 2010 and June 2011. And before you think it’s because Apple's earnings must be slowing, that’s clearly not the case. Apple’s earnings have actually accelerated in 2011. Not just grown, but accelerated. There's a key difference. The growth rate is higher in 2011 than in 2010, 2009, 2008, 2007, and 2006. Basically, Apple's earnings growth rate this year is higher than in any year since the advent of the iPhone. Talk about acceleration in earnings. And yet the stock has gone nowhere this year. See below:

Now if that doesn't shock you, then this will. In fiscal Q2 2011, Apple reported a 6-year record high growth rate of 92.19% in earnings and 83.22% in revenue. That shatters the previous record of 86.03% earnings growth in fiscal Q2 2010 and 74.39% revenue growth in fiscal Q4 2008. After this report, Apple collapsed 14% over the next 3-month period on concerns that (insert any B.S. reason here). So after reporting the highest revenue and earnings growth rate in 6-years, Wall Street sells the stock down by $50.00 on the quarter leading to further massive P/E contraction.

And if that isn't enough to convince you of how mistreated the stock is relative to its growth, in the very next quarter -- fiscal Q3 2011 -- the company absolutely shatters fiscal Q2 2011's growth rate in every way. The company recorded 121.94% earnings growth which is the highest quarterly growth rate since 2004. You would have to go back almost 8-years when the iPod was just getting started to find a quarter with a higher quarterly growth rate on earnings.

Yet, despite this incredible year that Apple has reported, the stock is trading lower than it did 10-months ago and is now almost lower than it was a year ago. The company has accelerated and doubled its earnings, and is almost down on the year. It trades at under a .5 PEG ratio and less than 8x next year's earnings.

In spite of growing its TTM by 82.7% -- which is higher than every single large cap company in America -- Apple now trades at decade-low P/E ratio of 13.13. At the beginning of the year, the company traded at $364.90, which is a little more than $1.00 above Friday’s close. That means that even though the company grew its earnings by almost 100% on the year, the stock went nowhere. The chart below shows Apple's growth in its trailing 12-months of earnings over the past several years:

One would think that with such a nice consistent rise in Apple's trailing 12-months of earnings that the stock would would a nice consistent rise as well. But instead, what we've seen is the stock undergo a very brutal 2-year period of massive P/E compression. In fact, Apple's P/E ratio has fallen just about 59.12% in just 8 quarters which means that the company's earnings are discounted by about 60% more than they were valued at the start of 2010. See below:

Apple is now trading at the S&P 500 average valuation of 13x despite growing its earnings at a pace that is higher than the top 100 S&P 500 stocks and higher than 90% of the stock listed on the index. By pricing Apple at $363, the market is saying that Apple is worth no more than the average stock. 66% revenue growth and 82% earnings growth isn't valued at all. Neither is Apple's $100 billion cash (including fiscal Q1 2012) nor its entire balance sheet for that matter. In fact, Apple is now valued below the average stock trading on the NASDAQ-100 which suggests that the market believes that it is better to hold the NASDAQ-100 (QQQ) than it is to hold Apple from a valuation perspective.

Now even though Apple's growth has far and outpaced the growth of Oracle (16.35 P/E), Amazon (96.15 P/E), Google (19.19 P/E), Cisco (15.11), Qualcomm Inc. (20.62), Amgen, Inc (13.53), Comcast (15.11 P/E), IBM (13.95 P/E), Chevron (13.50), Johnson & Johnson (14.94 P/E), Procter & Gamble (15.49 P/E), and AT&T (13.91 P/E), the stock trades at a far lower valuation relative to these top holdings on the NASDAQ-100 and S&P 500. Some of these companies have actually contracted in 2011. Yet, the market values the earnings out of these companies on the order of 4-5 times more in some cases than they value the earnings out of Apple.

Light at the End of the Tunnel
The whole point of this article is to establish one thing and one thing only. That Apple is extremely undervalued contrary to what you might hear in the financial press. By demonstrating that the company is this undervalued, we will then be able to make a very compelling case for why this cannot go on forever. Eventually, Apple will hit an inflection point where this 2-year phase of P/E compression comes to an abrupt end. Apple is already valued below the S&P 500. If the earnings continue to come in anywhere close to 50% which is far below the 70-82% we've seen in the past 3-years, then the stock will have to rise significantly in order to merely maintain its depressed valuation.

For example, in order for Apple to maintain its depressed 13.13 P/E ratio going into 2012 and 2013 -- which is right at the average on the S&P 500 -- the stock will have to rise to $577.72 next year. Most good analysts are expecting the company to report about $44.00 in earnings next year and about $55.00 in earnings in 2013. That would be 62% and 25% growth respectively. That's far below the growth Apple has posted over the past four-five years (see above). Remember, Apple's growth is currently accelerating and completely discounted. This outlook presupposes significant deceleration in the growth rate as the result of the law of large numbers. Yet, what you should take from this analysis is that Apple has nowhere to go but up.

Suppose the stock's valuation were to contract further to a 10 P/E ratio within the next two years. Even if we get that level of P/E contraction which would be at a level that is far below the average on the S&P 500, the stock would still trade at $550 a share 2-years from now on the assumption of 25% growth between 2012 to 2013. What happens if the growth stays in the 60-70% range? What happens if the growth continues to accelerate? Neither of those scenarios are anywhere even close to being priced in. In fact, Wall Street is currently modeling for massive contraction in the growth rate. That's an unwise decision given that Apple just guided fiscal Q1 2012 -- this quarter -- for 80% earnings growth. Notice, Wall Street is modeling for 25% growth while Apple has guided for 80% growth. Who do you believe?

In future articles, we will build a case for why Apple is reaching a floor in this age of P/E compression, and is about to undergo one of the biggest rallies in the company's history. As the valuation becomes more depressed, the case becomes even more compelling and the chances for a massive Apple upside correction increases dramatically. Stay tuned.

110 responses to “Apple: The Most Undervalued Large-Cap Stock in America

  1. Excellent article Andy….hopefully in the near future Apple will get the respect it deserves!!!!

  2. Holy shit man. This is a great piece. How do you get this filtered to the mainstream media?

  3. I would like to see this artical out in the main streem media. Apple is like Silver, way under valued. One can only Find This info about Apple and Silver ,In the underground Press

  4. Exactly why you cannot “invest” in AAPL. I used to invest in AAPL, but I no longer have any faith in the big funds; they are incompetent. The big funds are not treating AAPL fairly and there is not a damn thing you can do about it. You should only “trade” AAPL and only stay long during the uptrends. You should then trade AAPL short during the downtrends. AAPL has longer and more brutal downtrends than uptrends. Sad but true. Andy, I believe you should forget 2013 and 2014 spreads because the big Wall Street firms may burn us all and take AAPL down to a p/e ratio of 5 or 6 or something really stupid.

  5. I’ve enjoyed trading Apple stock for many years. The one thing I appreciated from Steve Jobs was that he was a great story teller. It wasn’t only the material of the story, but the timing. Every month or so, there was something new to look forward to. The products speak for themselves. The financial numbers speak for themselves. However the master story teller is missing.

    Andy, I think some of that story telling needs to rest on your shoulders. The article is fantastic. However, I think BMK77 has a good point. People want to know what they should look for on the horizon. In this case, the obvious stands out – smartphone growth, each new smartphone buyer is an iTunes consumer – so used iPhones actually increase the customer base, iTunes app store is most trusted/most dedicated developers, blah blah blah.

    But new products – the move into the living room should be something we see in 2012 / 2013.

    New financial moves – what would happen if cook said dividends? what would happen if cook said split the stock in half?

    I’m thinking in terms of selling something to my wife. You just explained why this car is the perfect car above all others. The question still on the table is “why would she still love this car in a year?” All of us might see that the answer as obvious, but we are reading BC live each and every day. Sometimes it helps to get second grade on people, cut their meat for them and spell it out.

    Otherwise fantastic work. Sign me up for some data crunching (its my profession) and I’ll support the articles as they roll out.

  6. Andy,
    Thanks for the sound and logical reasoning behind this article. I agree with your arguments here and in your “controlling be bearish sentiment” article. The mainstream press have scared so many people into thinking every situation is another financial crisis for our banking system. Nothing could be further from the truth. It is true that we have only seen a 2008/2009 crisis once every 70-80 years, however, we have frequent corrections of 10-15% and recessions that generally happen every three to four years. Exports only comprise around 14-15% of our GDP and of that only 20% is exported to Europe. What if they fall into a severe recession over the Euro disintegration. Do you think hat their economies will contract by more than 10%? That would only impact our economy by 0.2% GDP growth. Do you think people will stop upgrading to smartphones? No. Life will go on.
    I appreciate all of your hard work. Hang in there. If you need any help wih the analysis, let me know.

  7. My friend is the publisher of Stock Traders Almanac. If you wish, I can forward all the info to him. Jeff is on CNBC many times. Maybe he could help out.Just let me know.
    Great work again!

  8. I think a companion piece to this would be the one that shows what WILL happen when P/E compression reaches it’s limit while the company continues to grow…ie “The Great Expansion”. Especially with retail investors, I believe that positive AAPL sentiment often seems to hinge upon fear of missing out on the next big run. While this piece demonstrates clearly that AAPL is undervalued, it might also demonstrate why a retail investor might want to avoid the stock (it’s gone nowhere despite the growth). The Great Expansion piece would show that THIS IS ABOUT TO HAPPEN AND YOU BETTER DARN WELL GET IN FRONT OF IT BEFORE JANUARY EARNINGS OR YOU’RE GOING TO MISS THE FAST BOAT TO AAPL 500.

    Thanks for all you do, Andy. I can tell much of your motivation with this sentiment push is for us BC subs whom you feel responsible for. We appreciate it.

  9. Brilliant presentation. Zaky says the things that needed saying for a good while and backs it up with the facts. While he may have no future in politics with that attitude, I appreciate the breeze that will clear some of the fog that surrounds the best company on the planet and many of the minds that inaccurately contemplate it.

  10. Andy, you have my positive response. I remain 100% invested in Apple as I strongly believe in the company, the products it manufactures and it’s future. Articles such as this are well thought out and will hopefully help convert the skeptical masses. Another great job Andy. If you feel that positive responses from your subscriber base will help get your articles published then lets all get on board now!

  11. Andy, I really can’t imagine how you would’ve stayed sane during the financial crisis if BC in its current form was up and running at that time. I may regret saying this if things really fall apart, but I think managing these “sky is falling” periods will prove invaluable down the line and highlight the need to be patient, calm and properly diversified. Sure it would be more fun if we held 370, unloaded our cash and immediately rode the wave up (could very well still happen) but adversity, even if its fleeting, will make this publication stronger.

  12. This is an incredibly true story. The company has it’s best years ahead of it.
    Thanks for enlightening the retail investors and the entire investing community in general.
    This is very vivid, true and emphatic!

  13. This is SOLID analysis. Thank you for bringing light to the Apple investment story.

  14. Thanks for a very informative and insightful article. It is a shame how the market does not value fairly one of the greatest companies in American history. Just as I was reading elsewhere that the majority of online orders over Black Friday was conducted using Apple’s devices, that iPhone 4s is beating all sales records,that Apple will have $100 BILLION in cash in a few months and no debt, this article stunningly shows that the stock market views the company as average. Average?! I find that incredible and I hope others do too, based on what this article so well demonstrated.

  15. It seems that a key threshold has been crossed here in 2011 in regards to AAPL stock. Apple investors have always expected P/E compression. Nobody ever thought that such a large company would levitate in the 30-50 P/E area when the time came to report 100 billion or revenue (that time is now). So here we are in 2011 having dipped below the other heavy hitters of the stock market in terms of P/E ratio. “Cisco’s (CSCO) 15.11 P/E ratio (earnings contracted in 2011), Oracle’s (ORCL) 16.35 P/E ratio (less than half of Apple’s earnings growth) or Google’s 19.19 P/E ratio (grew 15% this year).” At a P/E ratio of 13, AAPL can now truly be compared to these and other large cap stocks on it’s merits and when that happens, look out.

    The January ’12 AAPL earnings report (happening in a mere 6 weeks) is going to mark the end of the Apple naysayers. They already have what they were after… an insanely undervalued stock; there’s nothing left to take. Apple is now valued like they wanted, like all of the other companies growing at 0-20% per year. But, when AAPL reports another 60-120% growth quarter while it’s valued at a 13 P/E, with nearly 100 billion of cash, the trip to AAPL 500 is going to be fast and it’s going to be furious. There’s a reason all of the analysts have had a 450-650 target on Apple this whole year. Buckle up, that reason is about to whack everyone on the head.

  16. This excellent article’s thesis is backed up with solid data and analysis. Apple still has tremendous room for growth. The global smartphone market is still relatively young, in the 2nd or 3rd inning at most. Most of the world’s mobile phone users have yet to convert from a basic cell phone to a smartphone. The iPad is penetrating both the retail and enterprise markets, and has a very long runway for expansion.

    For all the media coverage AAPL receives, it is the most misunderstood stocks around. This article corrects the misunderstanding, with data, facts and rigorous analysis.

    As the article clearly demonstrates, AAPL is by far the most undervalued large cap stock. As much as AAPL is undervalued now, it will have much room to go up. Investors getting into the stock now will be richly rewarded in the long run.

  17. Great article! Of course, it’s precisely because companies are NOT valued correctly, at all times, by the market that makes it possible to make huge money sometimes in the market. And Apple looks to be a rare opportunity indeed. As for the financial press: is it really a surprise that the same people who didn’t see the financial crash coming can’t calculate a P/E ratio?

  18. After the Mac, investors who missed the boat said, “I should have bought back when AAPL was xxx.xx. Oh, well, now AAPL’s big run is over…I missed it.”

    Then the iPod came out. Investors who missed the boat said, “Damn, should have bought back when I said ‘I should have bought’ after the Mac… Who knew? Oh, well, now AAPL’s big run is *really* over…I missed it.”

    Then the iPhone came out. Investors who missed the boat said, “Damn, should have bought back when I said ‘I should have bought’ after the iPod… Who knew? Oh, well, now AAPL’s big run is *really, really* over…I missed it.”

    Then the iPad came out. Investors who missed the boat said, “Damn, should have bought back when I said ‘I should have bought’ after the iPhone… Who knew?”

    This article explains why AAPL’s run is nowhere near over, and investors who miss boat after boat will continue kicking themselves.

  19. Great Article! Apple is definitely undervalue and we are not even talking about cash that apple holds vs other companies. Soon it will cross $100B in cash.

  20. Very nice article. I think the mistake many investors are making is assuming that because AAPL’s market cap is so large, it must be pricing in the same explosive growth rate the company has experienced in recent years and require the regular introduction of breakthrough products. Your analysis definitively shows that AAPL is trading well below even extremely conservative growth estimates. P/E compression can only go so far, and the stock is due for a big move upward — likely by mid-late December as January’s earnings start to get factored in.

  21. Apple has so much cash that with this growth rates it will be able to buy itself private very soon :-)

    • China has the cash and they have a desire to diversify their reserves away from sovereign debt. Makes perfect sense for China to take Apple private, perhaps in partnership with a couple key Apple execs. China labor makes all the Apple devices already. A real arbitrage opportunity. If the numbers weren’t so big, might have happened already. China could use current Apple cash/equivalents, plus future cash flow, and have it pay for itself in a couple years.

      I actually fear that Apple might go private. Normally as a stockholder you are delighted when this happens. This alone tells you how undervalued Apple is at current market cap.

  22. Meanwhile, back in Cupertino…Apple is quietly stockpiling billions in cash. When will Wall St. to wake up and smell the earnings? There’s also still a ton of growth potential in the Macs because Apple’s market share is only about 6.5% and growing according to this cnet article:

  23. The Apple story is remarkably simple to consumers. Those of us who buy Apple don’t consider competitors products, we don’t even consider those other companies to be competitors. That’s the kind of brand loyalty no marketing can by. That’s what you get from being the best and caring about your customers.

    Apple doesn’t just profit from mere products. It’s true profit driver is continuous disruptive innovation. When Apple sets it’s sights on an industry, companies in that industry shudder. Their complacency is about to become their imminent demise. (See recent articles about TV manufacturers scrambling to find out what Apple is building it to copy it. Haven’t they learned that doesn’t work?)

    By the time they ‘catch up’, Apple has once again pushed the boundaries of what the particular product is capable of, adjusting consumer imagination and expectation in the process. And is already eyeing whole new product categories or redefining ones we are familiar with. Apple leads, industries follow.

    I’d rather bet on real innovation every time. And if that innovation comes at a discount to the wider market, I’d have to be pretty crazy to buy anything else. 

    They gave us the first real PC, the first great music player, the smartphone that defined what a smartphone could be and a new category of computing device whose adoption has been nothing short of astounding. Oh and they just mass-marketed voice based AI which is about to usher in a bigger device revolution than multitouch. 

    And some people want to bet against these guys? 

    • Completely agree. Once you buy the apple “solution” you don’t look back. Everything is so nicely integrated that I don’t have to act like tech support for the family. They figure it out on their own.

  24. This is a refreshing dose of common sense. It stands to reason that the P/E can’t contract forever, and even if growth slows (to 50%? to 30%? ) , there will come a point where the stock will be forced into a closer correlation to its fundamentals. This is the investment opportunity of a lifetime, imo.

  25. Excellent article…solid analysis . The comparison to other leading large cap companies is almost unbelievable.
    AAPL is such a bargain at current levels.

  26. Fantastic article Andy! Thanks for compiling so much information that is obviously escaping big-money managers these days. Retail investors like myself appreciate good, solid analysis. Keep it up!

  27. Nice work.

    Looking at your analysis, I am reminded of an article in Fortune last week ( ). Is it this inability to value future growth which is the cause of Apple’s undervaluation? I see five forward growth paths for Apple, and in each they potentially gain a dominant position, or already have one:

    1. New Businesses: Mobile retail. IBM’s analysis from Black Friday suggests they already lead. Number two in this market is “Android”, but Android is a community, not a company and not a stock. We know NFC/RFID is coming, too.

    2. New Markets: I’ve read many analysts’ comments regarding Apple’s potential, and brand value, in international consumer markets such as China, and in the Enterprise market, where they appear to be on the verge of gaining substantial share.

    3. New Products: We are already inundated by rumors of the new Apple TV, and one can surmise that the reveal of Siri in iOS is a precursor of what is to come for an iOS-based television. We know their product cycles are multiyear, so one should assume that there is more in the pipeline.

    4. New User Interfaces. Clearly, Apple leads in pioneering a new UI distinct from GUI, and we see in Siri the first productization of what clearly is years of investment. Again, we know there is more in their pipeline.

    5. New Computational Paradigms: I have as many US patents in replication as anyone, and I believe iCloud is poised to be a dominant replication product. It will enable a new class of enterprise applications, and will be a key to enterprise penetration. I have done a lot of public work on Grid and Cloud, and I believe Apple is the first company poised to make Cloud an architecture for computing, and not a synonym for “hosting” or “timesharing”. This potential in fact dwarfs all others.

    If, as the Fortune article above suggests, the issue is a perception that Apple is out of innovation, how does the sell-side reconcile this view with these clear future directions? These future innovations don’t seem to require a lot of imagination to see. I know you have a lot of insight into the markets, and I would love to hear your thoughts on this seeming disconnect. Or am I mislead by the Fortune article, and instead their is another factor causing the undervaluation you cite?

    Thank you for posting this. I look forward to more analysis from Bullish Cross.

  28. Andy – thanks for the fact-filled analysis. I especially appreciate the comments about the irrational behavior of the market to such a fantatic growth profile. It is frustrating to the individual investor, and breeds a strong sense of mistrust to the market as a whole. It is important to constantly review the facts – as you do regularly and consistently.

  29. Excellent graphs/data to highlight the huge undervaluation of AAPL, which ultimately will be to the huge financial benefit to those investors wise enough to realize/capitalize on this situation. Although anyone who studies the fundamentals can reach the same conclusions, it’s amazing how much the press, Wall St, and retail investors miss the mark. The graphs in particular reveal some interesting items when the #s are shown in historical trends:

    1. current P/E of 13.13 is lower than any recent quarter including the 2008 financial crisis
    2. 604% earnings growth vs 81% stock price growth since 2007! A factor of 7.5x that the stock is lagging
    3. average annual earnings growth >60% with a minimum of 33.9% … shows how underestimated the P/E ratio is vs this earnings growth. Even taking the perennially severely-low estimates of Wall St. for future growth over the next few years (in the 20s%) makes the low P/E laughable
    4. quarterly earnings growth rate exceeding revenue growth rate in every quarter other than around the 2008 financial crisis — shows the strength of the Apple’s margins and supply chains (Tim Cook)
    5. the jump quarter-to-quarter of the TTM earnings…shows how much the stock price lags the earnings $ growth (just to keep the same undervalued P/E)

    The point about the misplaced focus on trivial items (e.g. iPod revenues) is spot on. Folks miss the point that iPhone revenues are dominant and AAPL share of the smartphone market is still small (20s%) while its share of the overall market is very small (4-5%)–Horace Dediu points out how the smartphone market is still growing rapidly and taking share away from feature phones–all data points supporting the continued opportunity/growth of AAPL. Imagine when the China Mobile deal comes through in the next year (630+M subscribers or 6 AT&Ts! in new market)…

    The way I see it…huge growth opportunities + severe valuation = great situation for investors who realize both (almost makes me want the public investors to keep being ignorant for a while longer until my buy orders are filled). lol.

  30. This article reaffirms my belief in what I see as the world’s greatest company. When it comes to innovation, product placement, logistics and fiscal prudence only Apple stands above all others. This article is what is lacking on CNBC, Bloomberg, and all the other so-called financial media outlets (i.e. a sophisticated understanding of one of the greatest American success stories which you support with comprehensive facts). It is a shame that these other news outlets offer empty arguments and fear-based tirades. I guess that is what sells these days, factual distortions and agenda-driven media. Keep up the great work, your articles are not falling on deaf ears.

  31. Hey Andy, small typo in the 3rd to last paragraph:
    “Remember, Apple’s growth is currently *accelerate* (accelerating?) and completely discounted.”

    By the way, I think Twitter will be another great means of disseminating this. Let us know when the article is fully ready for the public so we can blast it to our streams.

  32. Amen. the financial press/media calls Apple a “high flier” the likes of Amazon, Netflix, Priceline, etc. they refuse to consider actual revenue and earnings growth when looking at how much the stock price has appreciated in the last several years. as you’ve pointed out here, the stock price appreciation isn’t even close to matching how much Apple’s business is appreciating.

  33. Apple innovates and disrupts repeatedly. Wall Street repeatedly ignores such innovation and disruption. Zaky clarifies/massages/condenses these issues so BullishCross members benefit in short/long term investing in AAPL.

  34. “…Wall Street is currently modeling for massive contraction in the growth rate. That’s an unwise decision given that Apple just guided fiscal Q1 2012 — this quarter — for 80% earnings growth. Notice, Wall Street is modeling for 25% growth while Apple has guided for 80% growth. Who do you believe?”

    Of course Wall Street has been modelling for massive contraction in the growth rate next year, every year since pretty much forever. They haven’t been right yet.

    And I suspect you would have to go back further than that to find a quarter where Apple didn’t meet their own guidance.

    Have Apple ever guided higher that 80%. I can here that P/E compression creaking.

    • Precisely! It’s amazing how some people (Clearly not customers or people with any understanding of consumer technology. More likely the  proverbial out of touch financial analyst) continually insist that Apple’s growth is about to slow dramatically. 

      The numbers disagree, customers disagree and the imminent rise of new Apple dominated product categories disagrees. 

      As you said, they’ve been predicting the same last year, the year before etc.  — And we’ve seen just how ‘accurate’ they’ve been.  I’d argue Apple is at a better place right now than ever. 

  35. The growth numbers for Apple in this article are simple incredible. I am not sure how a retail investor after reading this article could say that a $350+ stock is expensive. The rumor mills are saying that in 2012 Apple will add a mini IPad, a more powerful Ipad3, an IPhone with a 4″ display, to just mention a few potential NEW products in the pipe line that will continue to drive strong growth. According to Peter Misek with Jeffries, he has claimed recently that Sharp will provide IGZO (indium, gallium, zinc) LCD panels for the next iPhone and iPad. IGZO panels would allow for thinner designs and improved battery performance. SJ may be gone but as a brilliant man would do, he has left years of innovation in the Apple pipe line. Oh and I forgot to mention the Apple Itv and . . . . .

  36. I think the story would be more compelling if it drew more from the non-financial aspects of the marketplace. Despite all of Apple’s success it still has very low market share in most of its marketplaces – except for tablets. There is still so much room to grow market share. This is, of course, a two edged sword. Small market shares can be easily wiped out. We need to defend the existing share and why it can and will grow. If some of Horace’s work at Asymco was incorporated, if possible, it would help defeat the arguments that there is little growth potential for Apple. We cant just assume that Apple will grow and therefor its earnings will grow. We need to articulate how and from where that growth will come. It is not just market share, it is also China and other new markets from existing products. As Horace has pointed out, the market is not willing to give any value to potential new products, so maybe there is room to work on that argument or perhaps it is futile. The most impressive thing about Apple is that not only is it producing top quality products, but it is doing so at a lower cost than anyone else seems to be able to achieve. Given its cash reserves, it is well positioned to outlast nearly all competitors and is already taking some of them down. Lastly the stores are a tremendous competitive advantage as they don’t have to give up profit to the resellers on a large portion of their sales which goes a long way to preserving gross margins and generating more cash.

    The negative sentiment seems to focus more on the softer issues rather than the financial issues. Seriously, Its hard to argue with a straight face that the P/E needs to be lower unless you have serious qualms about growth which would need to be based on lack of competitiveness. Where is the lack of competitiveness if you have top quality, at the lowest cost, at a price that competitors cant touch and a distribution system that is unparalleled. These are the reasons I own Apple. These are the factors that make me comfortable when the stock goes down as much as it has. The upward gravitational pull is very strong and ultimately always affects those that try to defy it.

  37. Andy… What more can I tell, you are absolutely fantastic!
    I hope this article reaches the masses, and yes I hope it reaches the bald guy as well.

  38. Finally!!!! A data driven analysis showing the gross undervaluation of Apple. No rumors… no gossip.. no speculation… Pure FACT!
    It will really be interesting to see what happens because of this ridiculously low valuation. Does Apple go private?

  39. I keep thinking – and Andy has said this before – that if they maintain this rate of earnings for just two more years or so, their cash pile will grow so large that the enterprise value will crash into zero **unless the stock price begins to grow at pace with earnings**. The last time apple’s stock price was less than book value was around 1997. To be at book value when a company is losing money is one thing, but a company that produces $40+ EPS annually? Has this ever happened before in modern history?

  40. To cut directly to the chase, the last part of the article “Light at the end of the tunnel” is very compelling. It is hard to argue against it. It lets the reader put his own P/E and earnings estimates together to come up with a forward price. It is a subtle way of letting the reader believe he/she came to their own positive conclusion about where Apple’s price is heading. It allows them to make their own case and sell it to somebody else. Nice job.

  41. If a china telecom deal is announced I expect price increase and a PE expansion which is likely early part of 2012.

  42. Nice to see some common sense regarding how undervalued Apple is. Even if somebody is bearish regarding PE compression – say down to a PE of 10 by the end of next year, explosive earnings growth will still return over 20% in a year. How crazy is that?

  43. Appreciate the excellent analysis. AAPL is printing money while AMZN is giving away Kindles to try and establish a foothold in the tablet market…..yet guess who is Wall Street’s darling.

  44. Honestly, when are the mainstream analysts going to stop looking at headlines to make their forecasts. Are they all really so lazy that they cannot put together the same type of analysis as done here? There is so much wrong with both how AAPL is valued today, and how mainstream financial press handles this information that you have to wonder how they keep their jobs.

    Thankfully there are experienced analysts/traders like Zaky that will take apart the numbers, build a case, and offer an alternative to the ‘headline investing’ so common to today’s investment media. Let’s all hope some of those media outlets pick up on this and start looking more objectively at the incredible growth story before them.

  45. This analysis is crazy good. It’s time to load the boat. For anyone on the sidelines, this would be your opportunity to board at the ground floor. The window will close as soon as the run up to Jan earnings starts. And then your upside will have diminished.

  46. This is brilliant. Thank you.

  47. I have joined BC publication since the first day . Andy Z , the publsiher , has only released superior articles , thorough research and has yet once again show again in this artilce his is deep understanding of the markets behavior . This is unbiased professional reporting in its truest form. Any investor follwing apple should come to BC first.

  48. ’bout time we stood up for a great company and a great stock (now at bargain basement prices). Thanks for the great work Andy.

  49. Andy, I think it’s “Whom do you believe” instead of “who”. I was taught if the answer to a question could be “him” that “whom” was correct. When you first give Apple’s p/e I think you should add “forward” so that it won’t contradict the next instance when you give 13 as the p/e. On a more broad note, I’d be more encouraged to invest in AAPL if I didn’t think there was a Wall Street war on the stock; I would deemphasize that aspect. I think I’d be more inclined if I thought that Wall Street or other investors were being silly or had overlooked just how undervalued Apple was. Impressive graphs and great writing. Thanks for advocating for the stock. I’m sure it takes a lot of work not only to write the article, but to get it circulated.

  50. Excellent article that clearly demonstrates the upside down world of Wall Street stock valuation. You never hear this strong analysis from the pundits and talking heads. You only hear ” Has Apple lost it’s way? “. The investment public has to see this type of financial analysis inorder to understand that Apple today represents one of the all time best investment opportunities one could have for a strong financial portfolio. For both a growth investor and a value investor, there is no better option out there in today’s market environment. Congratulations on the excellent presentation of the FACTS.

  51. Watching tv today, I see retailers are capitulating. Best Buy and Sprint are both advertising their Apple products. Both historically push other brands for higher profit margins. But it’s becoming harder to deny what people want. Wall Street won’t be far behind.

  52. Saw this linked on Twitter from Turley Muller. I think investors better hurry to get in on this stock before it skyrockets like it has before. This is a very good entry point, and the informatiom mentioned in the article can’t be ignored much longer

  53. Mainstream media were the same folks estimating Apple might sell a million or two iPads after a few years. Andy has shown his analysis as being much more accurate than the typical analyst “shoot from the hip” — Nice job!

  54. Right after you mention $44 earnings and $55 earnings, how about including the line about how Apple will be able to pay off its present market cap in 3 years? That’s something easy to grasp and made an impression on me when you used it before.

  55. This is the best time EVER to invest in AAPL history.

    1. It’s extremely discounted

    2. Smart phone and Tablet devices are going to be game-changers for next decade.

    3. iPhone and iPad are going to immensely benefit from this change in landscape.

    4. Apple will be able to maintain its growth from China, India and other emerging markets.

    5. The leadership – Tim Cook’s ability to execute – is incredible and it will ensure that Apple is easily be the market leader for next 3-5 years.

    This is the best life-time opportunity to get into Apple and the window to get in here is not going to last long.

  56. right on andy. i have ZERO doubt AAPL will soon be at 500-600.

    the retail investor is just not privy to the data we have here at bullish cross– we are at a tremendous advantage.

    for whatever reason, wall street finds it easy to manipulate apple’s price– whether it is because AAPL is the #1 widely held/traded equity amongst retail traders, or because Apple is not vocal about its share price—

    —but whatever the reason is, such manipulation can only exist in the short time frame. wall street can only keep the stock down for so long before the other actors and market participants, e.g. hedge funds, mutual fund managers, etc, load up their carts to the brim.

    You are exactly right. the P/E can only go so low.

    The coiled spring can only compress so far before it explodes. $$$$$ AAPL!

  57. Seriously, I can’t wait till AAPL blows out their numbers in January.

    I can’t go two days without hearing another major iPad story.

    An iPad in every cabin? That’s the plan at one cruise line

    Imagine all the people who will be now going on cruises who will be getting to play with an iPad for the first time, going home and buying one for their family and telling all friends.

    Think about it. This is the true beginning of a paradigm shift in the way people use/consume information.

    Those monitoring the trend know that there’s been a steady trend away from desktops to laptops. And now from laptops to tablets. Desktops –> Laptops –> Tablets.

    I’ve seen the writing on the wall for decades leading to this.

    They are firing on all cylinders and producing *exactly* what the public wants at exactly the right time, all while locking up the supply chain components for their own best pricing.

    And Apple is only at the beginning stage of their influence into the consumer electronics space.

    AAPL has created an innovation factory with the ability to create disruptive products.

    I am confident we will see the birth of several new iDevices— all of which will be category killers in the vein of iPod/iPhone/iPad


  58. Nice article. It’s clear from the data that Apple is undervalued. The stock is like a volcano waiting to erupt. The next few months are going to be very interesting. Once everyone understands what is happening to Apple, the stock is going to be in demand like $2 Waffle Makers on Black Friday:

  59. Andy,
    Congradulations on the Apple Insider publication. Nice to see other than in BC.

  60. 2 things: DATA is DATA. Numbers don’t lie.
    One more thing: Enjoy the AAPL ride coming the next 12 months.

  61. Really enjoyed the well laid out facts behind the article.

    It’s nice to see the AAPL data placed into this type of perspective…. really shows how undervalued the stock is.

    Thanks for the info.

  62. Well written. Case closed.

  63. Another perspective.
    Last Friday (black friday) I Called 1800-MyApple to order an iMac while driving to work. I was on hold > 20 minutes, gave up, called back to hear “due to overwhelming calls please call back later” blah blah blah.
    Today, I went to an Apple store at Stanford Mall CA. Granted its a small store, but could not even get in.
    Anyone who was out Apple shopping, care to add color to their Apple store experience this weekend??

  64. I’ve just bought an iPad 2 as a gift to my father-in-law last weekend. He is an 82-years-old man, and never used a computer. I tried to taught him web surfing, email, photo taking with iPad (he never used a digital camera before), listening music (he never used a CD player in the past 30 years), watching Youtube, writing notes (yeah, you bet it, he never know how to type on a computer before)…etc.

    I thought that he’s one of the “touch native generation” as a 3-years-old baby. They didn’t use a computer before, iPad is their first computer in their (whether 3 or 80 years) lives, and Apple is the only known computer brand for them. Either they are our children, or they are our parents, they are both iOS native generation.

    And Apple is standing on the top of this marke, this massive change. As John Gruber said, “Apple is to the post-PC era what Microsoft and Intel combined were for the PC era…. Then consider that the post-PC/mobile market is going to be bigger than the PC market.”

  65. Simply awesome, Andy.

  66. This is an amazing article. Just a matter of time when Buffet announces his purchase of shares of Apple.

  67. Great article Andy. Someday very soon the market will figure it out and AAPL will go on one of its “30% increase in 30 days” type moves – just like March ’09, February ’10, September ’10, and July ’11.

  68. Great article, wonderful data points, flawless logic, but….
    Knowledge is a system. Because and only because there is knowledge, the information is important. The whole effort of mining information from the data and presenting it in digestible form is driven by belief that there is a common knowledge, say the correlation between P/E and valuation. The decision making based on the information extracted from data (to award or to punish the stock) is based on knowledge. Without it the information is pretty much useless.

    I have a problem buying a notion that the Wall Street is stupid, blind, or lacking such an obvious information. One of the extention of Murphy laws (Mayer’s Law) says , “if the fact doesn’t fit the theory, throw away the fact”.

  69. Great article Andy!!! It’s nice to read an article written about AAPL based on fact rather than fiction.

  70. The question of why is an interesting one? Any thoughts? I think the traders and hedge fund owners still use windows and blackberrys. They think apple is not a tool for business, and just can’t get past that.

    • I venture that fund managers of major institutions that hold AAPL find it more profitable to engineer a 50+ rollercoster 4 times a year rather than simply running aapl to its fair value and keeping it there. These guys, not the retail investors are calling the shots. As long as they don’t feel that AAPL can leave the game, nobody can stop them to do whatever they find profitable.

  71. I don’t know if anyone mentioned this but over at AI folks are complaining about the PE ratio (8.25 P/E Ratio) in the intro; I see it was fixed here to (8.25 Forward P/E Ratio) can this be updated to quell these people. I loved the article but it seems a little long for the average reader, maybe the PE comparison and earnings can be broken down to just a single page or so for those with a short attention span.

    • So everyone has a different opinion about what to do with this article. Some want it to include thoughts about Europe and the broader market as well as make arguments about why Apple is a buy going into next year — basically they want me to increase the size of the article to the size of dissertation. Others want it shorter. Some don’t like the fact that they use P/E ratio without using the term “forward” and others don’t care. I can’t make everyone happy and I don’t really care enough to go to AI and ask them to add “forward” to the sentence. If people want to allow themselves to get bogged down by the inconsequential, that’s their problem and not mine. The first sentence is perfectly fine with and without the term “forward” in it. I’m not going to go further than I already have on this highly inconsequential topic that impacts literally nothing at all.

      The article is what it is.

      • Your article would be much improved if you would include a section on the historical uses/value of money, especially as it pertains to technological inflection points, such as the invention of roads during the Roman Empire, steam engine in 18th century europe, etc. This might give some insight on whether we should buy Apple tomorrow.

  72. Wow Andy! Yet another spot-on, compelling analysis of Apple and why it is the most undervalued large cap stock in America. What continues to surprise me is the low forward growth rate that the Wall Street ‘experts’ assign to Apple. Clearly the iPhone is just getting started, especially internationally, and the potential for Siri as a game changer technology is nothing short of amazing and one that can also be applied to new product categories (think TV). I see no reason why the recent growth rates can’t continue at nearly the same pace, despite the usual laws of large numbers. Thanks Andy!

  73. There is a lot of excellent information here that a lot of market participants aren’t aware of as yet. But if they were, they would behave differently. It really comes down to growth.

    This article points out how much Apple is growing and how the media, analysts and ultimately the market don’t seem to be paying attention. The big question is will the company be able to continue to grow revenue and earnings? When I look at the markets Apple participates in (Smartphones, Computers, Tablets) it is clear that a lot of investors will be blindsided. In the phone and computer markets Apple has plenty of room to grow share. For tablets, Apple has a dominant position but the market is just starting out, so again plenty of room to grow as the market expands.

    Thank you for the excellent article.

  74. Another truly informative article. It has been amazing to see Apple take down other major companies (RIMM, NOKIA) now even HTC is warning! Apple needs to help out with a 10 for 1 or something else to gain investor interest again. Thanks for publishing actual facts and not nonsense.

  75. I’ve been apprehensive to be involved in the stock market for years. With the information you provide here and in your other articles, I have confidence in making educated decisions. I really appreciate the statistical analysis. Apple is a great company with solid fundamentals and a bright future. At the current value I find it hard not to invest more in the company.

  76. Great article Andy. I feel that Apple’s growth has been so outstanding that people just ignore it. Apple is so different from every other stock that it is easily ignored by 95% of investors. Thanks for the reminder.

  77. It’s because of these excellent fundamentals that when Apple starts to rally, it goes on a $90 tear in 2-3 weeks and self corrects itself price to the upside. We are starting one of those rallies now into year end. Hedge funds love to trade this stock, they push it down to load up for the next ride higher into new highs. They all know this is worth over $600, they are just accumulating it now.

  78. (Posted on the Appleinsider site today)

    Another Apple inside Apple

    The most common objection I hear from people about the long term prospects of Apple stock is that for AAPL stock to double in price, the company has to deliver the equivalent of another Apple, Inc., and so how could that be possible?

    The analogy is like “Look, you already have a 98 year old man here, and even though he is in superb health, and might live another couple of years, surely he is not going to live to be 200 years old!”

    What people and especially fund managers don’t realize is that Apple is not a 98 year old man, but probably more like a 50 year old guy that is moving with the athleticism, agility and strength of a 20 year old.

    As independent bloggers like Andy Zaky, Daniel Tello and Horace Horace have repeatedly shown, Apple indeed could generate another Apple’s worth of revenues and earnings, even with all the escalating competition all around.

    Unfortunately, that message has not gotten around, so there are skeptics all over the place. It certainly doesn’t help when talking heads on CNBC keep propping up every piece of LCD as an “iPad Killer” ad nauseum.

    Unfortunately, Apple, the company itself, is doing nothing to help out the shareholders. Steve Jobs never cared for Wall Street, and disdained people who were in it for the money. However, that approach is inappropriate today, given Apple’s market cap.

    A key part of being a public company involves at least an effort on the part of the company to make existing shareholders comfortable with the company, and attract new investors. Part of the job function for Tim Cook is to build up the price of the stock. I am not proposing hyping up the stock price, but the company has to at least let the stock price rise above its deeply depressed levels.

    That means being a little more visible to the investment community, providing a little more upbeat vision for the company, placing a put under the market by announcing a share buy back, periodically splitting the stock, and spending money on a few PR programs to build a little buzz about the stock. Surely, Apple needs no education on building a little buzz.

    I am not one of those calling for a cash payout or dividend, because I believe Apple is still a growth story and not a dividend story. But the company has to do a few things to make the markets understand that Apple is still a growth story.

    This is actually very important for the future of Apple, as a company, as well. Because if the stock continues to languish at absurdly low prices, and the PE ratio keeps getting compressed quarter after quarter, soon it will have a huge demoralizing effect on the employee base.

    Like it or not, employees of the company need to pay their mortgages, send their kids to school and save a nest egg for retirement. Sooner or later, people will start realizing that their hard work and effort will have far greater upside at other companies than at Apple, and that could lead to a growing exodus of talent, as the best and the brightest are always the first ones to leave. So by not having the stock perform well, Apple seriously risks losing key talent.

    Apple has the potential to become the world’s first Trillion dollar market cap company. By any objective criteria, Apple should already be in the $600-700 billion range in market cap. The stock is trading at half its value, even by conservative estimates, and this is not healthy for the company’s employees and shareholders.

    Kudos to Andy Zaky and the independent bloggers for their efforts in shedding light on this issue, but Apple Brass had better wake up, too, and do what the company can do to support the stock.

  79. There is no question that apple is significantly undervalued. It has the same PE on one year forward earnings as GE. Apple’s PE on one year forward earnings is lower than Western Union, yet Western Union is only estimated to grow at 10.5% versus the estimate for Apple of around 19% (which given history and what we know about the Company’s markets and pipeline, is probably an insanely low growth estimate). The problem, as is true of so many innovative and “different” companies, is that analysts do not understand how to value or look at Apple.

    Analysts have knee jerk reactions. The need to pigeon hole companies. If a company somehow breaks the mold, reinvents itself, or changes the rules, they are generally undervalued. Look at the different valuations for Amazon and Apple. Amazons current PE is in the high 90s based on a growth rate of EPS estimated to be in the 13-15% range. How does that work? Well analysts can pigeon hole Amazon as an online retailer. The great survivor and “grower” of the dot com era. They do one thing, really well and they grow revenues, even though their margins are thinnish. They get valued based on that revenue growth, despite the fact that valuation multiples like their price to free cash flow per share is about 4-5 times that of Apple (54 versus 11).

    Yet the truth is that Apple grows faster, has better margins, a lower valuation, a better pipeline, lower market penetration, and a more fragmented competitive landscape (Amazon has Wallmart and Barnes and Nobel as its competitors). But analysts can’t pigeon hole Apple, they find its story to be mysterious and confusing. They need more hand holding. They don’t understand Apples conservative accounting. In fact they don’t really understand what Apple is. They think Apple is the same Company it was in the 80s. They think of Apple vs PC. They think only iPhone vs Android.

    Analysts don’t understand the ecosystem concept that is probably the consistent driver of Apple growth. They think that Microsoft disproved that concept long ago and it can never reemerge (despite all evidence to the contrary). They think Windows and Android have the “right” model. The truth is that Apple is no more a “computer” or “hardware” company than Western Union is a telegraph company. Apple is an ecosystem consumer products company much more along the Gillette line as far as the product is concerned. They sell both delivery systems and sell content produced by others. They do so, among other things, by having a brand that is synonymous with ease of use and quality. My boss, the CEO of my Company, recently changed in his Samsung Galaxy Android for an iPhone 4s. He marvels every day at how much “better” it is. In his world better means it consistently delivers, it is reliable, it is easy to use, he doesn’t have to worry about security, about updates (or the lack thereof), about software incompatibility, or about software quality. He doesn’t have to go to the hassle of powering it on and off every other day, or having it freeze up or anything else having to do with quality or dependability. For consumers of all ages and economic standing, that is huge. People are fed up with Software malfunctions and slowness and issues and viruses. What is the solution to that frustration – Apple. Consumers see that. Analysts however, see a confusing valuation model. How do you pigeon hole a software, retail, computer, smartphone, music, video, tablet, tv, hardware, global, delivery company? They tend to throw their hands up and say, well its too big, its mature, its not going to grow despite its history, Steve kept it afloat and now it will sink, we don’t get it.

    Apple is very simply a business and consumer software (broadly defined to include music and video) delivery ecosystem company. What is this ecosystem? Well let’s cast our minds back to the earliest days of Microsoft. The great desire in the early days, and a desire that Microsoft fulfilled in part and ignored in part, was to have business software programs and operating systems that worked well with each other. What computer users wanted (and to this day still want) was that things work together well. Consumers were forced for years to “compromise.” If I bought one brand, I expected that the brand’s products would work well together, and would work better together than other products. Its a logical and reasonable expectation. Microsoft Office partially fulfilled that promise. Microsoft in focusing on monopolizing (you should pardon the expression, but it is what it is, and every business wants to do it) the operating system market, however, worked strongly against the ecosystem concept. The Android Model today is exactly the same as the Windows and DOS models 30 years ago. Windows worked on multiple platforms and with all brands of software. Anybody could develop for windows. Windows got breadth of market, crushed all comers (including Apple) and took over the world. Android seeks to do the same and the analysts believe it will follow the same route as Windows.

    Software consumers have not, however been stagnant, they have changed and become both more sophisticated and more demanding. In essence Apple has become a disruptive influence in the market very recently (within the last few years) by fulfilling the demand and expectation of consumers for quality, stability, ease-of-use, refinement, seamlessness (iCloud being only the most recent example) and (like every consumer since the dawn of time) design sensibility. Other companies remain with the old, industrial, low quality, high penetration concepts that are daily becoming more and more outmoded. Yet analysts who value apple, still see Windows and Android as the “right” model, simply because it is the only one they know.

    For the first time this year the Gartner Group said that IT departments should support Apple products (I think they specifically said the Mac). Why, after years of saying IT shouldn’t support Mac? Because they said that the best, most innovative and productive people in Corporations, are demanding it by investing in their own Macs and doing their work on them. Analysts undervalue Apple because they don’t understand changing consumer demand patterns and they don’t get a company that probably was way early (like 30 years) in their business model concept. What Steve Jobs did so well was not so much the design or operations aspect of his business (despite his perfectionism). What he did amazingly, in true genius fashion, was see the potential of electronic products of consumer demand. He saw better than most, where things were going, what was out there. In designing his company in the early days he understood what the market should be, not how it would get there or how long it would take. It is like Da Vinci’s drawing of air craft. The market, the potential, the capacity, the science were all there, but people had to go through the process of getting to a place where they could realize that potential, and it took longer than expected. Lest we forget, it was a mere decade ago that the iPod came out. At the time it was derided, yet it began a revolution in, I would argue, three industries, music, hardware and video/movies. Parts of those revolutions have not even concluded yet.

    What analysts don’t get about Apple is the fact that with all this innovation, with the legacy of Steve Jobs (not necessarily his presence) and with the direction of the consumer, Apple is positioned to become much more than Microsoft ever was, and it has only just begun. I would argue that the death of Steve Jobs is not the end of Apple’s journey it is only the end of the first act of the new Apple. Call it Apple 3.0 if you want. I would also argue that Apple is and can be bigger than its current hugeness (a major stumbling block for Analysts) because it has an ecosystem that consumers are more and more realizing is what they want, because of Apple’s under-penetration in the markets that ecosystem attacks and because they are in the early stages of their Company’s reinvention begun a short 10 years ago, not the mature stages.

    There is no doubt in my mind that Apple is tremendously undervalued. One commenter said it was valued like a 98 year old man but it was really a 50 year old that feels like a 20 year old. I would say that in fact it is in its mid-thirties and the prime of its earning power.

  80. @oscarrob, brilliant summary!

  81. Andy,
    Your points are excellent as always. How is a company growing revenue & earnings at the rate Apple is and is trading at a P/E like this??

  82. Great work as usual..

  83. Great article and a great time to be invested in AAPL. Thanks for taking the time to quantify why and why now!

Leave a Reply