Are Apple Shares Still a Buy After Its Earnings Blowout?

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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Comments from our Foolish Readers

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  • Report this Comment On April 24, 2014, at 9:46 PM, larryw101 wrote:

    Another baited title by a true Motley Fool.

    These clowns at Motley go the way the wind blows.

    No true conviction here, only garbage journalism.

    Thanks for wasting my time Motley.

  • Report this Comment On April 24, 2014, at 11:25 PM, AceOfSaves wrote:

    @larryw101

    Do you ever post a comment without criticizing The Motley Fool? For someone who thinks The Motley Fool is a waste of time, you sure do spend a lot of time posting your negative comments.

    @TMFTtheDude

    Thanks for the article, Andrew.

  • Report this Comment On April 25, 2014, at 8:12 AM, demodave wrote:

    Fine article, Andrew. Good work. Sure, it's upwardly toney, but we long-term long-holders could use a little bit of an upside bump right now.

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