By Clement Thibault
The company which boasts the biggest market cap in the world—$551.34B as of yesterday’s close—has been having some trouble recently with its share price. Apple (O:AAPL) peaked at $134 last April, but the company now trades for under $100, a loss of value of 25.9%. In the past two months alone, the stock has dropped 16.5%, underperforming the S&P 500 by 7.6%.
There are a few reasons for this devaluation. First and foremost, there’s a growing concern that sales of the newest iPhones, the 6s and 6s Plus, may not live up to expectations. Given that the iPhone accounts for about 65% of Apple’s current revenue, underperforming in the sector could be extremely bad news for the company.
This concern has been fueled by retailers such as Best Buy (N:BBY), who partially blamed the smartphone segment for weak holiday sales. For perspective, according to a study by Consumer Intelligence Research Partners, iPhones accounted for 50% of new mobile activation in the US in Q4 2014. A drop in sales of in-store purchases of iDevices could indeed be one of the reasons for Best Buy's holiday disappointment.
The rumor of slowing sales joins investor worries about the recent lack of innovation from Apple. Over the past few years there have been quite a few market participants who question the company’s place at the top of the NYSE. Still, Apple has repeatedly proved doubters wrong by reinventing itself and thus showing constant EPS growth—atypical for a company that's already this big.
Another ongoing issue has been the bad publicity Apple has gotten for its hefty cash reserve. Yes, it has $200 billion in cash, but most of it is stored overseas and will be heavily taxed on any attempt to bring it back to the US. Apple has recently been criticized for evading US taxes, driving away some investors and consumers. Of course, Apple isn’t the first company to employ strategies abroad to minimize taxes at home; Google (O:GOOGL) and Microsoft (O:MSFT) for example are other big tech names to do so, but the unusual size of Apple's cash hoard has drawn the lion’s share of attention from media and politicians alike.
So is Apple undervalued, and if so, should you buy it?
Value investors like to look at a few parameters. The Price-to-Earnings ratio of Apple is a modest 10.52, thanks to its earnings per share of $9.22. The average P/E ratio within the industry is 14.55, meaning that a return to the industry average would be reflected in a share price of approximately $130. Apple’s Price-to-Free-Cash-Flow is another indicator of undervaluation. With $11.99 of cash per share TTM, Apple's ratio stands at around 8, with the industry median around 15, according to Gurufocus.
Yet another good sign for Apple is its Return-on-Investment (ROI). Over the trailing twelve months the stock's ROI has been hovering around 28.23%, more than double Alphabet's (O:GOOGL) 13.02%.
Based on the above data it seems obvious to conclude that Apple is currently undervalued on growth concerns. It would appear investors believe sales and growth will drop and are pricing the shares accordingly.
This can be a good thing going into Q4 earnings. Short term, the drop in sales could be largely priced-in, meaning that a surprisingly good report may drive shares up, while a letdown may not have a dramatic effect on the current price.
Long term, investors may be too concerned over passing growth troubles and the competition every mega-cap innovator eventually faces. Right now investors seem overly skeptical of Apple and its mountain of cash, hampering the share price and thus creating a good buying opportunity if you are among the company’s true believers.
For this reason, AAPL’s Q4 earnings report marks an important turning point for shares in 2016. Plus it provides the company with an invaluable opportunity to—once again—prove nay-sayers wrong. Stay tuned for the report, today, 5PM Eastern, after the closing bell.