It's a Great Time to Be an Apple, Inc. Shareholder

The risk profile for Apple stock may be better than ever before.

May 29, 2014 at 7:09PM

In this pricey market, it's getting increasingly difficult to find good deals. Contrary to the robust optimism priced into the market at large, one the world's most well-known tech brands -- Apple (NASDAQ:AAPL) -- is still trading at a very conservative valuation, giving investors an excellent point of entry. In fact, Apple shares may offer investors a better risk profile today than ever before.

Apple Store China

A crystal ball?
Will investors who buy Apple shares be rewarded later this year? I have no idea. Two years out, maybe? No clue. Attempting to speculate price swings is a fool's errand, one that real Fools are happy to avoid.

But one thing investors can see in Apple today is that the company is still performing exceptionally well, even though its shares are trading at a valuation that assumes very little growth, if any, going forward.

To highlight just how conservative the valuation is for Apple shares, consider that it currently trades with a price-to-earnings, or P/E, ratio of 15, compared to the S&P 500's overall P/E of 18. Is the comparative conservative outlook for Apple's business merited? Probably not.

AAPL PE Ratio (TTM) Chart

AAPL P/E Ratio (TTM) data by YCharts

Apple's risk profile
Risk, in finance, is ultimately a measure of the chance that an investment position will lose value. Given that Apple is priced for nothing more than EPS growth in line with inflation, Apple only needs to grow its bottom line, over the long haul, at a rate that will meet or exceed this expectation in order for investors to earn meaningful returns.

Can Apple achieve such growth? Two key parties seem to think so.

Analysts expect Apple, with the help of its massive share repurchase program (backed by unprecedented cash flow), to grow EPS by 15% per annum during the next five years -- a rate that puts the historical rate of inflation to shame.

Perhaps more importantly, Apple management seems more confident than ever in its product pipeline. Not only are investors in the fortunate position (thanks to comments from Apple CEO Tim Cook) of knowing Apple is going to introduce products in entirely new categories this year, but Apple's Internet Software and Services chief Eddy Cue said at this week's Code Conference that Apple has "the best product pipeline I've seen in my 25 years at Apple." Those 25 years include launches of the iMac, iPod, iPhone, and iPad, products that revolutionized the way we interact with technology.

Then there's the company's robust and unparalleled ecosystem of integrated software, services, and hardware that keeps customers coming back for more. This ecosystem limits the risk of worst-case scenarios, e.g. if Apple's upcoming iPhone 6 is a flop.

Is it reasonable to expect Apple can grow EPS at a rate that exceeds inflation during the next five to 10 years? Definitely. A conservative valuation combined with opportunity for meaningful EPS growth make Apple stock a steal, even after its recent run-up.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Daniel Sparks 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.

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