This Tech Stock Really Is a "No-Brainer"

Noted investor Carl Icahn is no stranger to controversy. Investors likely remember his recent battle with fellow hedge fund manager, Bill Ackman, over nutritional supplement maker, Herbalife (NYSE: HLF  ) . Ackman took the short side of the bet several months ago and paid dearly for it. Icahn was right about Herbalife (at least for the time being), and now he's moved on to another company-- technology juggernaut, Apple (NASDAQ: AAPL  ) .

Apple's widely hyped iPhone announcement fell flat, and shares dropped 5% the same day. Icahn quickly stepped in, giving an interview on CNBC in which he disclosed he had purchased more shares of Apple, adding to his already sizable position. Is Icahn right about the house that Steve Jobs built?

A supposed "no-brainer" investment
That's how Icahn described Apple at its current valuation, and it's extremely difficult to find fault with his argument. Icahn referred to the stock as very cheap, and indeed, Apple does appear to be one of the most cheaply valued stocks. Even among technology stocks, Apple looks like a bargain.

The S&P 500 trades for a trailing P/E multiple in the high teens, and even stodgy fellow tech giant, Microsoft (NASDAQ: MSFT  ) trades for 12 times its adjusted fiscal 2013 earnings per share. Apple exchanges hands for just 11 times trailing earnings. This is despite the fact that, while Microsoft posted 5.5% revenue growth in its most recent fiscal year, Apple generated 11% revenue growth through the first nine months of its current fiscal year. Also, consider that Microsoft has a much more heightened risk profile due to its continued tethering to the personal computer.

More catalysts than meet the eye
Apple's business collapsing is simply unrealistic, and the market is also completely glossing over the potential partnership with China Mobile (NYSE: CHL  ) , the largest telecommunications carrier in the world. China Mobile serves 700 million subscribers, and to this point, has not made the iPhone or any other Apple products available to its customers. A partnership with China Mobile could be a very lucrative opportunity for Apple, but clearly the market is unwilling to give it any credence whatsoever.

Plus, investors were wrong to hype up Apple's recent iPhone announcement in the first place. These aren't the new products the market was hoping for, nor were they supposed to be. The iPhone 5S will indeed have a few interesting new features, such as a fingerprint scanner and an 8-megapixel camera. The iPhone 5C is a cheaper model of the iPhone 5. Quite simply, these models are the preface to market penetration in new geographies like China, India, and South Asia, where Apple can secure millions of new customers in its ecosystem.

In the end, Icahn is right
Apple appears to be as close to a no-brainer as a stock can get. The market pessimism over the company's future has gone way too far. At its current valuation of 11 times trailing earnings, Apple's iPhone sales would have to fall off a cliff for investors to not earn at least a reasonable rate of return going forward. Sure, it's unlikely Apple will repeat the same type of growth trajectory that propelled it to the top spot among the world's most valuable companies by market cap. But, calls for Apple's demise are far too irrational, and at the same time, there's no denying the math.

Apple's gigantic buyback, in addition to a hefty 2.7% dividend yield plus likely double-digit dividend growth over time means investors have multiple layers of safety embedded into Apple's already discounted valuation. In total, Apple plans to return $100 billion to shareholders over the next three years through a combination of dividends and share buybacks.  And, let's not forget the $147 billion in cash, equivalents, and marketable investments on its books, implying an even bigger margin of safety. There's simply a far too compelling risk-reward proposition to not own shares of Apple. While I don't always agree with Uncle Carl, but on this particular stock, I think he's right on the money.

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Read/Post Comments (10) | Recommend This Article (4)

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  • Report this Comment On September 13, 2013, at 9:45 PM, adamwins76 wrote:

    Finally, a realistic look at the value of Apple's stock. There was an unbelievable amount of negativity about the stock this week -- almost all completely unwarranted given how cheap Apple is at the moment.

  • Report this Comment On September 13, 2013, at 9:49 PM, dave1992 wrote:

    What good is a deal with China Mobile if Apple refuses to offer a phone at a price affordable to the masses in that country? Why did Apple have an event if not to "hype" their new products, if they can even be called that? I have accumulated Apple stock all the way up from $70. There are many reasons to believe Apple stock is grossly undervalued. The question I have is this: Will Apple's true value be realized by the market before Apple drifts once again into irrelevance?

  • Report this Comment On September 13, 2013, at 10:03 PM, DanManners wrote:

    I wonder what the 50,000 Apple employees do all day?

    Do they paint plastic iPhones?

    Hold hands and sing songs?

    We know what Google people do, they innovate.

    What does Apple employees do all day? They can't be busy?

  • Report this Comment On September 13, 2013, at 10:05 PM, feelfoxy wrote:

    The contract pricing for Iphone 5c 16GB from China Mobile:

    0 with 3 year contract of 299 Yuan monthly plan ( ~ $47.84);

    0 with 2 year contract of 329 Yuan Monthly plan ( ~$52.64);

    You pay upfront but receive rebate counted to your monthly charges...

    The telephone bills are significantly cheaper in China than that in USA...

    Source: http://tech.163.com/13/0913/08/98KVS3SI000915BE.html

  • Report this Comment On September 13, 2013, at 10:14 PM, feelfoxy wrote:

    How much do we pay in USA?

    $79-99 upfront but monthly bills are averaged > $50;

    In comparison, Chinese got better deals, granted most of them are not wealthy but there are more people "with money" than people "with money" in USA.

    My house valued at 200K, with this money I can not afford a decent apartment in Beijing...(maybe a decent bathroom)...

    My idea is that there are a lot more people with significant purchasing power in China than an educated American could imagine...

  • Report this Comment On September 13, 2013, at 10:24 PM, dave1992 wrote:

    Sounds great. Why then have Apple and China Mobile failed to come to an agreement that would surely be mutually beneficial?

  • Report this Comment On September 13, 2013, at 10:25 PM, dave1992 wrote:

    H.L. Mencken - "When somebody says it's not about the money, it's about the money."

  • Report this Comment On September 13, 2013, at 10:35 PM, feelfoxy wrote:

    Sorry I meant China telecom;

    The reason why China Mobile did not have a deal with Apple is possibly because the 3G network of CHL uses TD-SCDMA, which has lower capability than the other big two players in China. Out of 745 Million users of CHL, only 150 million use 3G...

    But we should look forward...

    at the same time, more users possibly jump the ship from CHL to China Telecom or Unicom...

  • Report this Comment On September 14, 2013, at 8:08 AM, demodave wrote:

    Feelfoxy, I believe you have answered dave1992's question: CHL's technology has not been favorable to iPhone uptake. Both the iPhone 5C and the iPhone 5S have radios that are genuinely ready to run on CHL's network. (I believe the 5 did, too, or at least it supported TD-SCDMA, but maybe the frequencies didn't match.) As far as it being about the money, both sides had to make investments to make the deal workable.

    Given that China Mobile is essentially a government agency and interested in "protecting its business", it probably took a few years to even *like* the idea of inviting the iPhone. Then it took time to figure out *how* to invest that money to build out the infrastructure. Then it took time to *execute* on that investment strategy.

    Similarly, Apple had to see some form of interest or commitment from China Mobile to change its device plans. It took time to go from 3G to CDMA in the USA to bring Verizon on board. It was a good plan by Apple to start with 3G, because that could be marketed to the USA and Europe, which are more immediately friendly and valuable markets. Adding CDMA was a necessary second step. Adding TD-SCDMA had to wait until China Mobile made ti worthwhile.

    I call this the dance of two porcupines trying to shake hands....

    Even if Apple "only" gets 10% of China Mobile's audience, that's still an extra 70 *million* phones a year. And Apple has very high user retention. the only reason Apple's market share has shrunk is that cheap, POS Android phones have attracted low-budget "smart phone" users. With entry into China (China Mobile in particular), Apple will be able to milk those customer away and suck them (almost inexorably) into the iOS ecosystem.

    I think *all* the BRIC nations will eventually succumb. Apple doesn't need 50% market share by number of units sold, because Apple has the lion's share of the profits.

  • Report this Comment On September 14, 2013, at 8:41 PM, hangzha wrote:

    Carl is right simply because he sees Apple has phone cover now! The phone cover easily drive revenue 10-20% up. Why those seasonal analysts can't see the cover? The Apple new release has 3 things: 5c, 5s and the cover! Wake up folks.

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