Based on most trading ratios, Apple (NASDAQ: AAPL) looks quite cheap. In fact, it looks like a steal based on a comparison of next year's earnings and today's market price. But this hasn't persuaded many prominent value investors to dive into Apple. I believe that's a function of the high level of uncertainty associated with Apple's future earnings.
Apple looks very cheap
Apple is a value stock based on either trailing earnings or forward estimates of earnings -- 14 times and 12 times, respectively. And that's before adjusting for Apple's huge cash hoard, which would make the company seem even cheaper. It's not as if Apple is a low-quality, cigar-butt-type. It's a high-quality business with a strong brand, loyal following, and nearly 30% operating margins. Growth has slowed a bit, but the company is expected to generate 8% and 10% growth in sales and earnings per share in fiscal 2014. Based on those numbers, you'd expect value investors to be jumping in with both feet. But based on SEC filings, that doesn't seem to be the case.
Value investors aren't buying
Aside from a few notable examples, like David Einhorn of Greenlight Capital, most value investors have steered clear of Apple. Based on the most recently filed 13Fs, Baupost Group, Brandes Investment Partners, Southeastern Asset Management, and Berkshire Hathaway don't own any shares. Dodge & Cox and Ruane, Cunniff, & Goldfarb hold only token positions. If you sort through the top 100 owners of Apple stock, you'll see lots of big-name firms, but very few if any dedicated value-investing shops. This is a bit strange. Apple is an above-average company selling at a below-average price based on its historical financials. But value investors aren't buying, and it's probably because of Apple's uncertain future.
Uncertainty clouds intrinsic value
My explanation for this strange phenomenon: Apple's future is too uncertain for value investors. The typical value-investing approach involves coming up with an estimate of intrinsic value based on future earnings, free cash flow, or dividends. This can be done a number of ways -- via a discounted cash flow model, dividend discount model, and so on -- but all the methods require at least a mildly reliable estimate of future economics. Unfortunately, even "mildly reliable" future estimates for Apple are totally impossible. Technology is a tough industry for long-term predictions, and consumer electronics/hardware is particularly fickle. Competition is fierce, and consumer tastes change rapidly. Even Apple, which has always had a popular brand and loyal followers, nearly went under in the late 1990s. Apple's earnings in five to 10 years could be much larger or smaller than today's profits. So coming in with an intrinsic value, which is a key component of value investing, is impossible to do with any sense of intellectual honesty.
None of this is meant to suggest that Apple won't be a good investment going forward. I own it myself. It just doesn't fit as a typical value investment. And investors who own Apple need to be comfortable with a good deal of uncertainty in the future.
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