Are Apple Shares Still a Buy After Its Earnings Blowout?

With Apple's shares up huge today, is the tech giant still a buy after its home-run earnings report?

Apr 24, 2014 at 8:30PM

Few saw it coming, but boy was it impressive. Shares of technology powerhouse Apple (NASDAQ:AAPL) are absolutely soaring today, especially for a company of its size, after Apple far exceeded virtually everyone's expectations when it reported its fiscal second-quarter earnings after the bell yesterday.

More specifically, Apple managed to handily beat analysts' average estimates on both the top and bottom lines, while also easily trouncing the projected number of iPhone sales.

Viewed through virtually any lens, Apple's earnings were a resounding success -- except for one point of view – the investor on the sidelines who's confronted with Apple's stock costing some 8% more than a mere 24 hours ago. Keeping that in mind, let's look at whether Apple remains a buy even after its earnings pop.

Why Apple's still a buy
Even though it will cost the investor on the sidelines a pretty penny more today versus yesterday, I'm still a firm believer that Apple constitutes one of the best buying opportunities in all of tech, especially on a risk-reward basis. By that I mean that I believe Apple offers investors reasonably limited downside risk with the chance to enjoy above-average appreciation for a number of reasons.


Source: Apple

For starters, there's the basic valuation arithmetic, which highlights just how cheap Apple is on a relative and absolute basis. On it's most recently updated balance sheet, Apple now carries a truly whopping $151.9 billionin cash and investments. Granted, much of that dry powder remains overseas; but backing it out from Apple's market capitalization implies a valuation of roughly $336 billion for Apple's core operations. And finally, when compared to Apple's $37.7 billion in profits during the last 12 months, Apple's core business is then valued at 8.9x earnings.

Hopefully, most of us realize the implication here. But if not, I'll just come out and say it: Apple is still insanely cheap.

Don't believe me? For a comparison, let's consider another metric: the P/E ratio. At the moment, the S&P 500 is trading at a normal P/E of 18.8x, so Apple's standard P/E of 13.5x is significantly lower than the broader market today. For a more historic context, since 1871, the S&P has traded at an average valuation of 15.5x, with plenty of wild swings in either direction. But again, the implication remains unchanged for our purposes here. Apple is crazy cheap. Hopefully, I'm starting to convince you.

There's still a growth story at work with Apple, as well
Much of the above work deals with the price side of the equation for Apple's bottom-basement valuation. But if we turn our attention to the denominator, or earnings, side of the P/E equation, there's also plenty of evidence to support more earnings growth from Apple in months and years ahead.

I've written on this topic so extensively, I'm almost blue in the face. However, between Apple's redesigned iPhone 6 already creating quite a stir, a new product potentially making its debut later this year, and further-out projects like mobile payments, Apple has no shortage of possible new money makers beyond smartphone and tablet growth that could help keep enriching its shareholders in the years ahead.

By simply addressing the high-level basics as to why Apple still seems attractive for tech investors today, I've hopefully shown that I believe Apple offers investors reasonably limited downside risk with the chance to enjoy above-average appreciation for a number of reasons.

This undue cheapness on Apple's stock might not last, though. As we creep toward Apple's product-launch cycle in the second half of the year, it's understandable that investors might begin paying more attention to Apple's disproportionately attractive valuation and bid up its shares. We certainly saw that same dynamic play out with Apple's trading in 2013.

Each investor has to make his or her own decision regarding savings and investments; but I, at least, am a firm believer that Apple's stock is certainly deserving of investors' attention, even after the company's home-run earnings report yesterday.

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Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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