Apple Stock: 4 Things Most People Get Wrong

I despise writing about Apple  (NASDAQ: AAPL  )  stock. There was a time when I loved it, but the ticker symbol has since become its own celebrity that is followed by both investors and non-investors.

Websites now churn out countless articles on Apple as a quick way to generate more traffic, although most of the articles regurgitate the same information and rumors ad nauseam.

Source: Engadget The polarizing iPhone 5c. 

Yet, Apple's self-sustaining hurricane of hype can also cause a lot of harm to inexperienced investors. Here are four of the worst investment takeaways that have distorted Apple's true value.

'I invest in Apple because I love my iPhone.'
Many investors tend to invest in Apple because they are fans of its products.

Some investors with a moderate understanding of the stock market might even refer to a well-known lesson from Peter Lynch, who advised investors to "invest in what they know." However, many investors only remember the first part of that lesson, and not the second -- in which Lynch teaches investors to use the PEG ratio to gauge a company's true growth potential, and that a low P/E ratio does not always equal an undervalued stock.

According to Lynch's lessons, Apple is a contradiction -- it trades at 12 times forward earnings, which means that there isn't much excitement fueling the stock, yet it trades with a 5-year PEG ratio of 0.87 -- which hints that its earnings could continue rising in the long term. According to Lynch, a PEG ratio under 1.0 indicates that the stock is undervalued and poised for higher growth.

Before Apple shareholders celebrate, however, they need to remember that the PEG ratio is based on forward analyst estimates, and Apple's can be notoriously lofty and random, such as Cantor Fitzgerald's price target of $777 and Topeka Capital's target of $1,001.

Microsoft (NASDAQ: MSFT  ) , by comparison, also trades at 12 times forward earnings, but has a much higher 5-year PEG ratio of 1.8 -- meaning that analysts expect its future earnings to rise at a much slower rate.

Therefore, by Lynch's definition, Apple can be considered an undervalued growth stock, while Microsoft can be considered an undervalued, stagnant one. That would be a much clearer distinction than simply "investing in what you know."

'Google is twice as valuable as Apple because it is worth $1,000 per share.'
Another common misconception that Apple-mania fuels is that a company's stock price indicates how valuable a company is.

The media's obsession with Apple and Google (NASDAQ: GOOGL  ) has exacerbated the problem, in which their stock prices are frequently compared side-by-side.

That kind of comparison doesn't make any sense at all, since a company's value is determined by its market capitalization (the number of outstanding shares times its current share price), and not the price itself -- which can easily be changed by splitting or reverse-splitting the stock.

Apple and Google, for example, have very high share prices because neither company has ever split their stock. Warren Buffett's Berkshire Hathaway's class A shares, which have never split, now trade at $175,400 per share. Does that make Berkshire more valuable than Apple or Google? Not by a long shot:

Company

Share Price

Market Cap

Apple

$523.43

$481 billion

Google

$1,015.00

$339 billion

Microsoft

$35.49

$297 billion

Berkshire Hathaway

$175,400.00

$289 billion

Source: Yahoo Finance as of Oct.29.

It's a common Wall Street tradition to split stocks when they are perceived as "expensive," although it is really more of a psychological strategy to convince inexperienced retail investors that the shares are now cheaper than before.

In reality, if Apple split its shares 10 for 1, 100 shares at $52 would be the same as 10 shares at $520 -- a simple fact that some investors surprisingly still can't wrap their heads around.

'Apple is one of the fastest-growing companies in the world!'
The public often believes that Apple is a rapidly growing company. It's not.

During the fourth quarter, Apple's revenue only inched up 4.2% year over year to $37.5 billion. Its earnings per share actually declined 4.7% from the prior year quarter. Despite the media's obsession with incorrectly comparing Apple to Google, Apple should only be directly compared to other personal computer manufacturers, such as Hewlett-Packard and Dell.

Company

Revenue growth

EPS growth

Apple

4.2%

(4.7%)

Hewlett-Packard

(8.2%)

(14%)

Dell

0.2%

(72.1%)

Source: Company earnings reports.

Based on that comparison, Apple isn't faring too badly. However, investors should remember that approximately three-fourths of Apple's revenue comes from the iPhone and iPad, instead of its Mac computers.

Yet, out of these three categories, only sales of iPhone units, which rose 26% year over year to 33.8 million, truly excelled. Sales of iPads inched up 0.7% to 14.1 million, and sales of Macs rose 6.5% to 4.9 million units.

Apple should also be compared indirectly to Samsung  (NASDAQOTH: SSNLF  ) , which it competes against in the smartphone and tablet markets. Compared to Samsung, however, Apple is simply outclassed. Samsung shipped 88 million smartphones worldwide during the second quarter, more than twice the number shipped by Apple in the same period.

As a result, Apple's global market share in both phones and tablets has been dwarfed by Android devices from Samsung and other manufacturers.

Operating system 

Third-quarter 2013
global market share

Year-over-year change
(in shipments)

Apple iOS

13.2%

20.0%

Google Android

79.3%

73.5%

Source: IDC.

So in the end, that's all Apple really is -- a slow-growth tech company that is growing its top line by single digits and continuing to post bottom-line declines. In addition, it is painfully undiversified and is being held up by a single pillar of growth, the iPhone.

'Dear Mr. Cook, please make these things that I've designed in Photoshop.'
Apple shareholders can sometimes be as oblivious to the truth as the Apple fans who line up around the block every time a new iPhone is released.

Apple's fans are often so obsessed they spend countless hours creating concept art for the next iPhone and iPad. On a side note, I've never seen anyone starting a blog recommending new designs for Hewlett-Packard to consider.

Source: Toxel.com iPhone concept art by Isamu Sanada. 

There's this expectation that Apple will dazzle the world again, as it did under Steve Jobs with the iPhone and the iPad.

Unfortunately, Tim Cook will never be Steve Jobs. Cook is to Apple what Steve Ballmer was to Microsoft -- a gun-shy leader who reacts to market trends rather than dictating them. Since taking over, Cook has played Wall Street's game of buybacks and dividends, allowed an activist investor to start calling the shots, and released new versions of its flagship products, which cannibalized sales of older ones.

A final thought
Financial writers, analysts, and random people on the street have discussed Apple's struggles to death. But honestly, there's not much to talk about.

Apple is just another tech company that is transitioning from high growth to slow growth. There are plenty of stocks on the market that are better than Apple -- in fact, simply investing in an S&P 500 index fund would have resulted in higher returns over the past 12 months.

AAPL Chart

Source: Ycharts.

So the next time you hear someone passionately gushing over the future of Apple, do them a favor and educate them in some simple lessons in how the company, and the stock market, actually works.

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 (12) | Recommend This Article (3)

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.

  • Report this Comment On October 29, 2013, at 12:59 PM, tangos88888 wrote:

    Thanks for reminding us of the things we all forget when we invest in Apple (such as $500 and $1000 stock cannot be compared side by side, I don't know who you hang out with, but my teenage niece knows how market cap and stock price work). Aside from that, in your final part of the article you state that Samsung is simply outclassed because they sell 88 million units. Now you are being naive one. Did you bother to find out what the profit margin for the same 88 million phones is much smaller than the margins by Apple? Who care if someone sells twice as many products. If in the end they are making half the money it doesn't matter, Apple is still more profitable.

  • Report this Comment On October 29, 2013, at 1:10 PM, nonbiasfool wrote:

    There's plenty more to talk about.

    Consider this:

    Ultra-high definition Apple TVs with 65-inch and 55-inch frameless screens are likely to launch by the end of next year, according to Advanced Research Japan analyst Masahiko Ishino. Speaking with The Wall Street Journal, Ishino said that the TVs will probably sell at anywhere from $1,500 to $2,500.

    Now consider the impact of a la carte TV?

    I connect my internet to my TV. I buy just these channels

    1) HBO

    2) CNN

    3) Disney Jr

    4) NFL network

    5) ESPN

    select-checkout

    Price per month $17.99 - There's my cable bill

    The biggest thing in development is right before your eyes and you don't see it.

  • Report this Comment On October 29, 2013, at 1:13 PM, chitownfool68 wrote:

    …and you fail to grasp one OVERRIDING fact, the iPhone is NOT a phone, it's a miniature computer, that happens to make phone calls. Sure, you can call it a phone because it's named such, but it's quickly rising to the level of a desktop/mobile class computing device. Samsung's devices are certainly less computing devices and more phones. Usage statistics and developer platform preference numbers clearly indicate this fact. The iPad and the iPod touch are the same as the iPhone, just missing the phone hardware for cellular calls but I don't see you referring to them as phones.

    While some of your claims are spot on, you're certainly showing a tremendous amount of Apple bias, not because of the "investing" implications of your claims, but because of your own PERSONAL bias to the company. That's perfectly fine, and I don't fault you for that, but don't claim a duck is eagle, when it's obviously a duck.

  • Report this Comment On October 29, 2013, at 1:13 PM, fmah9203 wrote:

    Slow growth stock or value stock? Without innovations, the iPhone, iPad et al will simply transform the company into a value stock fairly valued at 9x earnings. Apple can simply drop its prices and compete w/ Samsung for market share and continue to pay out hefty dividends to support its share price.

  • Report this Comment On October 29, 2013, at 1:33 PM, jdmeck wrote:

    Really? Samsung and class are two words that should never be used together. And I thought you actually had some intelligence until that point.

  • Report this Comment On October 29, 2013, at 1:55 PM, FoolSolo wrote:

    Have you considered adding some perspective to the numbers you stated? Sure, Android has many more manufacturers producing phones that use it merely because Google gives the Android away for free to drive Google advertising and search revenue. But comparing iPhones to Androids is very disingenuous. It's like comparing Tesla to all other brands of automobiles on the planet, from Yugos to Rolls Royce.

    Even if you limit the comparison between Apple and Samsung phones, you still create a muddy picture because Sammy sells phones in many categories at many price points, from low-end for under $100 to their flagship Galaxy S4. Again, comparing Ford to Tesla. Incidentally, S4 sales have barely reached 40 million in 7 months, despite the false advertising, fake reviews and all the gimmicks Samsung has been using (Google it for more details). Their sales volumes are really dependent on their low-end phones, many of which are sold in emerging markets, where their margins are razor thin.

    By contrast, Apple sells exactly 3 phones - the 4S, 5C and 5S. And all of them run iOS7, so consumers get a consistent and fully functional experience no matter which phone they choose. Yet Apple manages to maintain a margin of 36-37%. What do you figure Samsung's, Motorola's, HTC's or any of the Android maker's margins are?

    Consider also, where would Samsung's phone set business be if they hadn't copied Apple's iPhone so completely? There's a reason why every phone looks and behaves the way it does - because Apple revolutionized the phone design and everyone since has followed their lead.

    The key question for investors is whether Apple can continue to deliver sick cash flows, and whether they have any more game changing innovations to give us in other product categories. From a valuation standpoint, Apple is priced as though it will never grow again, or produce anything new ever again. That means there is little risk of downside, and lots up upside potential in my opinion.

  • Report this Comment On October 29, 2013, at 2:05 PM, whyaduck1128 wrote:

    I may not agree with a lot of the things said in this article, but it's good that MF allows a somewhat dissenting opinion to be published.

    whyaduck

    Long AAPL the company and the stock

    Not long AAPL the cult

  • Report this Comment On October 29, 2013, at 2:10 PM, bugnuts wrote:

    Apple is "outclassed" by Samsung? That's funny. Samsung may ship 88 million phones year (although there's no proof since it doesn't release the number), but Apple makes much more profit from fewer phones. In my book, profits are superior to simply cranking out volume.

  • Report this Comment On October 29, 2013, at 2:22 PM, dmvcal wrote:

    Actually, AAPL has split its stock. Their imitators are gaining increasing momentum; this is closing the gap, and squeezing AAPL's gross margin. A static target is an easy target. The current management group seems to lack the nerve, the imagination, to have engineered a hail mary innovation move. It isn't just their stage presence (lack of) that is dull. Consider their cash pile. Have they made a single market shifting acquisition to compensate for their utter strikeouts in mapping? Nowadays they do deliver nice enclosures, PERIOD. Meanwhile, Google takes shots; some of them will score. Fear of failure guarantees mediocrity. Time to clear out board & bring in Larry Page as ceo.

  • Report this Comment On October 29, 2013, at 2:57 PM, timmnsa wrote:

    AAPL has split its stock three times: '87, '00, and '05.

    How often does AAPL introduce new a product category? A rhetorical question, I suppose, but leads me to ask: Do you actually believe, per your profile, that "good things come to those who wait?"

  • Report this Comment On October 29, 2013, at 4:18 PM, lkmd98 wrote:

    I wish apple would spend all its money buying back its shares so all the idiots who use aapl as a day trade would get out. I can't wait till aapl actually relates to Apple Inc. I just watch Goog go up and up and with no real reason (nexus watch) come on!!! Get real....

  • Report this Comment On November 01, 2013, at 9:10 AM, Lowrider02446 wrote:

    To previous comments; An Apple standalone TV is not the savior here. Similar to how Apple changed the way we listen and buy music, apple has a great opportunity to innovate a UI that supports this. The current Apple TV box does not, microsofts new xbox 1 is spearheading the way, stepping over roku and others. I agree apple is shifting from high to low growth and it's nerve racking that so much weighs on the success or failure in iPhone market share. Good article all in all.

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