Apple (AAPL) is one of the most high profile stocks in the world. Regarding its valuation, people are often confused by its high price. Even though the price is high, Apple's valuation is significantly lower than its historical earnings growth rate and, more importantly, its forecast growth. Consequently, we believe that this high-profile growth stock that has recently began paying a dividend is undervalued at these levels.
About Apple, taken directly from its website:
Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile …show more content…
Apple has no long-term debt (red circle). It is currently trading at a P/E of 15.8, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 26.4. If the earnings materialize as forecast, Apple's True Worth™ valuation would be $2,563.34 at the end of 2017 (brown circle on EYE chart), which would be a 30.9% annual rate of return from the current price (yellow highlighting).
Earnings Yield Estimates
All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in Apple to an equal investment in 10-year Treasury bonds illustrates that Apple's expected earnings would be 10 times (purple circle) that of the 10-year T-Bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary and Conclusions
This article presented essential "fundamentals at a glance," illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the