Apple – A Buying Opportunity at $520?

Apple has been busy selling iPhones and making the new iPad mini in recent months yet to look at its share price, that has fallen by over 20% in the last 6 weeks, you’d think that sales had fallen off Apples very own “cliff”!.

The company has been multiplying and seemingly subdividing its products in order to reach every corner of the world. The latest iPhone version is now reaching the large and expansive Chinese market and the company came up with the mini iPad in an attempt to take share from Amazon and Barnes and Noble in the ebook markets. The stock price has been a one way spiral down since early September from a high of a shade over $700 to the current price of $525 – a whopping 25% haircut and carrying out a few hedge funds performance on the way… The big question exercising trader’s minds is- is it a great buying opportunity?

Early this year, during the April-May period, Apple entered a downtrend that saw its price drop from a then year high at $623.23 to $530.12. Again, many doomsayers predicted the end of Apple,  but the truth is that fundamentals were untouched and the company resumed its long-term uptrend, rising from a depressed $530 to a year high near $702 in just 5 months. At that time, all valuations pointed to a buying opportunity. Apple was growing much faster than any other peer and growing its market share. The Price/Earnings ratio the company was trading at that time was around fourteen, and given projected earnings for the following twelve months, it was clear the company was trading at a discount to the overall market.

Unfortunately for the bulls, the bears hit Apple again on September 18. With a diminution in market capitalisation greater now than that offered at May’s opportunity. 

Why the weakness?

With a current P/E ratio below 11 and in fact below 9 times stripping out the company’s net cash and for a company that has been growing at a phenomenal compound rate of 70% at the earnings level over the last five years and still has a projected growth around 22% for the next five, it seems very low to us. Apple’s current P/E ratio has been seen only twice before over the last few year – in December 2008 and in December of last year. In the first case, the reason was of course the Great Financial Crisis that was underway at that time. In the second case, it was related to the death of Steve Jobs. Interesting also to note that it happened in December in both cases. Even more interesting is the fact that shares recovered around 50% in the following six months.

The current P/E for the S&P 500 is 15. If we use the TTM EPS for Apple, estimated at $58.30 and apply that ratio, Apple should be priced at $874.50. Even if we apply a ratio of 11, Apple should be trading around $641 – again this doesn’t strip out the company’s net cash of $120bn. Further potential signs of Apple’s undervaluation is its current PEG ratio of 0.48.

The bears criticize Apple saying that its products are diminishing in quality and that its prices are too high and are due for compression of margins aswell as arguing that the iPad mini will cannibalize sales of regular iPads. These are some valid points to consider, but recent stats show that the company is not actually losing market share. The launch of the iPad mini has not been as cannibalistic as many feared too. With regards to the iPhone, Apple is looking to strike an agreement with China Mobile giving it access to 650 million potential subscribers.

Apple is expected to present revenues of $221.85bn next year, a rise of 15% and an EPS of $58.30, an increase of 17%. The company is very healthy to say the least, in financial terms, enjoying a cash pile of $120bn With a dividend yield of 2%, it will likely start popping up on income funds radars and the descent slow at the very least. The stock is exceptionally oversold and we wouldn’t be surprised to see a 5-10% rally over the next few weeks taking us back over $550.