AAPL at 6x After-Tax Earnings?

So I’ve never really looked at buying AAPL but my math is showing the company is trading for around 6x after-tax earnings if you net out the cash and investments. Is this right?

Consumer technology is such a tough market to predict and the odds of a company staying on top for an extended period of time (decades, not years) will be a challenge. I guess as fast as the company grew it could also retract but at what point is it a no-brainer?

I own an iphone 4s and an ipad 2 and because I use various iOS apps I don’t know that I would switch to Android anytime soon. That does not mean that I will be buying a new iphone every time they release one, but odds are good that at some point I will buy another one.

Is Mr. Market over-reacting to the downside on this company?

even 9 times with the cash hoard it looks good, but, there’s better returns without the ‘headline risk hype’ out there.

I wouldn’t be surprised if the stock doesn’t gain traction in the next quarter, they’ll do a split.

The apple juice is watered down. They were the innovator for some time changing the game on mobile devices. Now they are subset of the mobile device commodity basket. Reversion to the mean. I wouldn’t bet anything on Apple beyond what I’m comfortable throwing on Black out in Vegas.

They are the 2nd best place to work out (right behind goog), have a pile of cash, and recruit some of the smartest minds out there. At these levels you need to have faith in the fundamentals and have to assume new innovation is on the horizon. When this occurs, you’ll see the speaking heads talking this to 1k again.

I think this decline is just silly. I’m far from an Apple fan boy, I mean I love my ipad but I have an android cell phone and a Dell desktop at home. Even if you assume some gross margin compression from a cheaper iphone, or maybe a bit of discounting to combat competition, I find it hard to believe this valuation is warranted. Sure they won’t grow leaps and bounds like they used to, but they’ll still grow sales faster then most large tech companies.

Yeah, I agree. Roughly 300B in EV, and 41B in FCFE. It’s ridiculous. I mean sure, FCFE could drop…and this might be a giant value trap…but they have started paying a dividend, so there is strong potential for good returns here.

Apple has traded at low earnings multiples for a long time. What was the justification for this to begin with? Also, what assumptions would make Apple’s future earnings not be valued in the same way as other companies? This low PE thing has been going on for some time, and I don’t think there has been a good consensus to explain this.

I wonder if people just believe Apple will be an also-ran in 20 years. It’s only a matter of time before the next Apple-like company appears and nom-noms up the market.

I dont necessarily believe in the next aapl - aapl could always incorporate a msft strategy and just buy up these start ups left and right.

is it apple products that are so good? or apple’s brand? (I’m an apple, I’m microsoft)

if the latter, they can buy up all the start-ups they want, they’ll still be apple.

I would say both - aapl products create the value in the brand. I totally got f’ed in the market today so i shouldnt even be posting on this tab of the forum.

Ratio-wise, It is pretty cheap any way we slice it - even assuming some negative growth for safety.

However, is it cheap enough? I mean, without a catalyst, we will usually want stuff that is extremely underpriced, so it can get back just by earnings alone in the medium/long term.

Their products have been sucking, in my opinion. The shareholder pool seem to be a bunch of wild speculators (although a lot of them are probably out already).

Yet, I’m tempted to sell some Puts on them. One can sell June 22 ATM Puts for about 25 bucks (6.4% of the 390ish price). At worst, I’m buying AAPL at about 365. Unless their products starts to catch on fire spontaneously (again), I think that’s pretty cheap.

Damodaran has some stuff on AAPL - this is from january http://aswathdamodaran.blogspot.com.br/2013/01/are-you-value-investor-apple-test.html

since everyone in the world believes AAPL is cheap, i’ve done my best to attempt debunking this idea. my biggest issues with the AAPL is cheap argument are below:

  1. the cash is not tax-free. the cash on hand varies depending on the person who owns the stock. for me, being canadian, the $123 billion in net cash (not cash on balance sheet, cash offsetted by current liabilities) is worth $66B b/c of 15% withholding tax and roughly 31% investment tax. lets say for argument sake that the after-tax value of the cash is $105B to account for a 15% dividend tax.

  2. AAPL trades at an incredibly high price to sales ratio even when removing the $105B in cash.

AAPL trades at 1.6x sales versus Samsung at 0.83x sales, Nokia at 0.84x sales and Blackberry at 0.32x sales. Is AAPL trading at roughly 1.9x Samsung and Nokia and 5x Blackberry cheap? I can’t say for sure. In the very least, it doesn’t look incredibly cheap based on P/S.

  1. AAPL’s earnings experienced a rare meteoric rise due to rising sales and still high margins. As margins decline (marketing costs rise to push a higher and higher volume of sales), long-term earnings growth will be nothing like we saw in the past. Since earnings growth is unreliable at this stage, the P/E valuation metric can be thrown out the window. If earnings growth is negative (or well below market earnings growth rates), 10x earnings can be extremely expensive, though look inexpensive on the surface.

furthermore, comparing AAPL’s P/E to AAPL’s one profitable comparable (Samsung), it doesn’t look cheap. AAPL trades at a P/E of 5.6x and Samsung trades at a P/E of 6.3x. Yes, its cheaper than Samsung on the surface but AAPL’s margins are falling quickly. again, just another roadpost telling me that AAPL isn’t wildly cheap.

I think I’ll leave it at that. I’m not going to try to convince anybody either way on AAPL’s valuation. Just keep in mind that you’re buying it at a fairish valuation relative to Samsung (based on P/E) and an expensive valuation relative to all of its peers (based on P/S). for these reasons, I wouldn’t expect plenty of upside in AAPL shares, without a complete upward revaluation of mobile handset sector.

Hmm. You’re basically saying that AAPL value comes from high margins (the implication of high P/S and “low” P/E). Maybe this explains why AAPL investors demand such high earnings per share price - sales probably will not decrease by half quickly, but margins can…

exactly. i find that AAPL speculators tend to compare AAPL to non-comparables like MSFT, ORCL or IBM on a P/E basis and assume its cheap based on an extremely simple comparison. the fact is that the entire mobile handset sector trades at a low P/E b/c all PC manufacturers are going to attempt to break into this market, in one way or another, with their large cash hoards. in addition, many in the mobile sector are not profitable (BB, NOK for example) yet they have plenty of cash (or saleable assets) to fight their way to profitability likely forcing AAPL to market harder and/or spend more on R&D to defend their current portfolio of products, hurting margins and likely lowering revenue growth below what many forecast.

if AAPL goes up 100%, Samsung will likely go up 200%, BB will likely go up 400% and NOK will likely go up 500%. obviously these number are for argument sake. not all are guaranteed to do well but I fail to believe AAPL will see much upside without sentiment improving for the entire sector. is AAPL cheap, probably not. I think would rather buy Samsung if I had an ability to do so. until AAPL trades at a 30-40% discount to Samsung on an earnings basis, i’m hardly interested (for margin compression reasons and momentum reasons).

Apple isn’t comparable to other mobile handset makers…what are Nokia’s margins?

I like some of MLA’s analysis. I posted this in another thread:

Haven’t updated my underweight AAPL thesis in a while. In addition to some of the things I’ve written over the past 6 months, couple updates (I cover intl & em, so this is fun for me).

Bull case: the bull case for AAPL is valuation and remembering their market dominance in the past

Bear case: eroding market share and collapsing margins.

So, for the bear case to win out you have to justify the low valuation. I think much of the valuation is because people have a model for what happens when a handset company fails (Nokia, Motorola), and it is not pretty. Obviously we have noted that AAPL is losing market share to Android based phones. As a datapoint update to that thesis, AAPL has moved to a six month product refresh to keep up with Android based phones. That entails greater costs and lower margins, but the real key is that AAPL is reacting to the market, no longer defining the market. So, the low valuation may well be justified.

Is a bounce in price possible? Sure. Is it worth the risk? Absolutely not. Valuation is not a catalyst. With AAPL you are getting a historically good company for the valuation, but margins are contracting, revenue growth is slowing and stocks typically do not do well in that environment

Point is, if Apple does not continue to innovate beyond what the competition is capable of, they will become more similar to other mobile device makers over time. This includes lower margins.

A good point, also this viewpoint doesn’t take into account the ipad or any of the computer or cloud parts of the business. Not to say the analysis is wrong, its well thought out, just incomplete by ignoring the other business sectors IMO.

The big question is how lower culd the margins go? They get the strongest brand and all those fans gluing Apple stickers to their cars (curiously, I’ve never seen an Exxon one).

I think Apple has a somewhat decent floor with cash + Mac + Iphone and Ipad gotta still worth way above zero. I don’t think they can become something like Nokia or BRMM (which were and maybe still are basically call options).

The hard thing is to buy something that is falling like a rock with no apparent catalysts. And uncertainty…

Another thing is that the SPX seems to be more expensive than cheap nowadays by many criteria. Maybe after a while Apple starts to get some momentum and this coincides with the next crash, to make it fall again. That would really suck for them…

Worth the gamble. I am staking $10k which I would otherwise have used for mundane booze, tail et al on this and buying May 3 expiring call options. Will I easily be wiped out if volatile is way too high even though it appreciates or given fact its short time interval I should be safe…Let’s hope this bad boy goes NFLX way jan 25th way.