Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Visualizing the Value in Apple Stock

With Apple (NASDAQ: AAPL  ) trading near $500 again, it's time to return to the drawing board and look at the King of Cupertino's valuation. As it turns out, Apple still looks tasty at $500.

Low expectations haunt Apple's stock
The market is a forward-looking mechanism, and when it comes to Apple, the market's forward look accounts for little (if any) growth in the company's bottom line beyond inflation.

Assuming investors require a 10% return on their investment in order to take the risk of investing in the stock market, a P/E of 10 suggests that the market believes a company's underlying earnings growth will not outpace inflation.

With Apple trading at a P/E of 12.5, it's easy to see the Street has low expectations for the company's EPS growth -- even despite its massive share repurchase program. Even at $500, investors' expectations for Apple paint a very gloomy picture when compared to other megacap cash cows: Google, Procter & Gamble, McDonald's, and Wal-Mart.

Source: Morningstar.

Relative to free cash flow, Apple looks even cheaper.

Source: Morningstar.

The story gets even more confusing when you take into consideration Apple's free cash flow yield. A free cash flow yield refers to the percentage of every dollar of sales a company is able to convert into free cash flow. 

Source: Morningstar.

Despite Apple's uncanny ability to turn a quarter of every dollar of sales into free cash flow, the market refuses to give the stock a premium.

The same story prevails when you compare Apple to all of its peers in the S&P 500 and the Nasdaq 100.

Source: Morningstar.

Source: Morningstar.

Investors who buy Apple today are able to lock in a nice dividend yield. If an investing thesis based on the premise that Apple is fundamentally undervalued isn't enough for investors to get excited about the stock, its dividend may provide the needed kick. Apple's higher-than-average dividend yield -- combined with its excellent prospects as a dividend stock going forward -- gives the iMaker a bit more appeal.

Source: Morningstar.

Does Apple deserve such a conservative valuation?
Maybe. But the stock is likely undervalued. With poor expectations already priced into the stock, any upside surprise to the company's future will likely serve as a nice bonus to the stock's story. Apple provides investors a unique opportunity to buy a market leader with little downside risk and at least some upside opportunity.

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2622818, ~/Articles/ArticleHandler.aspx, 9/26/2016 10:32:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,147.29 -114.16 -0.63%
S&P 500 2,154.03 -10.66 -0.49%
NASD 5,276.94 -28.81 -0.54%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 10:16 AM
AAPL $113.30 Up +0.59 +0.52%
Apple CAPS Rating: ****
GOOGL $806.47 Down -8.49 -1.04%
Alphabet (A shares… CAPS Rating: *****
MCD $116.60 Down -0.57 -0.48%
McDonald's CAPS Rating: ***
PG $87.20 Down -0.56 -0.64%
Procter and Gamble CAPS Rating: ****
WMT $71.97 Down -0.38 -0.53%
Wal-Mart Stores CAPS Rating: ***