Apple Stock: 4 Things Most People Get Wrong

I despise writing about Apple (AAPL +0.59%) 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 (MSFT 2.37%), 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 (GOOG 3.02%) 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:

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.

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.

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.

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.