“You paid $349 for what?!”
That was my wife’s reaction when I got home from work a few weeks ago.
See, my wife and I share bank accounts and credit cards. Anything we buy, we both see it.
This charge was for Apple Inc.’s (Nasdaq: AAPL) new HomePod — its smart speaker.
It wasn’t a surprise to hear that I bought one; I had been talking about it for a few weeks, and our 8-year-old son was excited to get it. So she knew I was buying it.
What she didn’t know was how much it costs.
At first, she thought the $349 purchase with Apple was to buy her an Apple Watch.
You can understand her disappointment.
So, like any good husband, my wife got an Apple Watch for Valentine’s Day this year — and she loves it.
We are putting the HomePod to good use. And I have to say, being an avid owner of many Apple products, I don’t see anything on the market that tops it.
But this isn’t just another raving review for the company — there are enough of those on the web.
Instead, let’s get back to the stock. I’ll explain why Apple, regardless of your personal smartphone preference, is a blue-chip stock you want to own.
The Most Undervalued FANG Stock
My colleague Paul believes Apple is falling behind its peers.
I take the other side of that view — and this is what makes the markets so dynamic.
Paul, who I highly respect and is the best stock picker I have ever seen, sees things differently than me — and that’s perfectly fine.
Years from now, one of us will be right, and one will be wrong — only time will tell.
What I do know is that when you get beyond the raving tech reviews for its products, Apple still has a lot going for it.
The stock trades at a current price-to-earnings ratio of just 18.5.
To put that in perspective, let’s look at some other FANG stocks, which are some of the largest tech stocks in the world.
Facebook Inc. (Nasdaq: FB) trades at almost double that, with 33.8 times earnings.
Amazon.com Inc. (Nasdaq: AMZN) and Netflix Inc. (Nasdaq: NFLX) trade at more than 200 times earnings.
Alphabet Inc. (Nasdaq: GOOG), the internet search giant known as Google, trades at more than three times Apple’s valuation, with a price-to-earnings ratio of 62.
You might think that these companies are not good comparisons since Apple makes smartphones, and these stocks are in all sorts of different businesses.
But they are each very large companies that have a lot of uncertainty around future growth — much like Apple.
However, there’s one thing Apple has that none of the other companies have, and that’s over $200 billion in cash.
Cash Is Still King
Having cash is one thing, but Apple said on its latest conference call that it aimed to be nearly “cash neutral” at some point, which means it is going to put that cash to work.
There are virtually an unlimited amount of ways Apple could spend its cash pile. It could buy back stock, raise its dividend, invest in its operations, buy another company or do a combination of any of the above.
Apple is known to be a cash hoarder, holding over $200 billion in cash overseas, which it is just now repatriating.
But its net cash position, which is the amount of cash after paying off its liabilities, is at $163 billion. This is what the company wants to bring closer to $0.
Now, let’s put this in perspective.
Apple could literally pay cash, which not many companies do, to acquire businesses since rates are so low.
It could pay cash and have zero debt to acquire all but 50 publicly traded companies.
That means, out of the S&P 500, Apple could literally have its pick out of 450 of those companies.
Apple Will Double
The average price-to-earnings ratio of companies in the S&P 500 is 25.78.
If Apple were to be valued equal to the market, that implies a 39% increase in share price — well within reason.
But based on Apple’s superior products, its market position and its strong ecosystem, you could easily argue the company should trade at a premium.
Its cash position allows for unlimited possibilities for Apple’s future.
Let’s apply a 37-times-earnings multiple instead, which is within reason when looking at the Facebooks and Googles of the world, and you could expect the stock to double in the next year.
Now, if you want to debate Apple’s product line, I’ll be glad to do that too. Just not in this article. Feel free to comment below, though.
The Bottom Line
Apple has plenty of upside, as I have explained.
Its downside will be limited due to its well-thought-out ecosystem and cash pile.
It’s not going to be that unicorn company that has another 1,000% to climb in a year or two — its best days are behind it.
But the stock is set to return significant gains of 50% to 100% or more in the next few years.
Regards,
Chad Shoop, CMT
Editor, Automatic Profits Alert