Apple Inc. stock is cheap is something Wall Street has been saying for long. But, the shareholders are wondering why the stock market is valuing the most profitable firm in the history as if it is some mediocre business.
Great firm, but not a great stock
In the past six months, the shares have lost more than 28%. Apple released a mixed quarterly earnings report, and gave a sober guidance on the current quarter
It wouldn’t be wrong to call the stock cheap at this level by most standard measures, says a report from CNBC. Presently, it is trading at 10 times the forecasted earnings for the coming four quarters versus 15 times the S&P 500.
Apple has net cash worth $153bn (that is firms cash holdings minus its debt). Excluding this cash, Apple’s value comes around 7.5 times expected 2016 profits.
Apple Inc. has appeared “chronically cheap” for several years, the report says. Since 2012, the forward P/E of the stock has continuously remained below the broad market multiple, and in April 2013 it reached a below 9. Apple is the apt example of the distinction between a great firm and a great stock.
Such depressed multiple is a challenge to the Wall Street over how to value leading firms.
How to value Apple?
It was impossible for most of the international firms that Jim Cramer follows to increase prices in the last quarter because of the environment. They all gave the excuse for not being able to raise prices of goods they sold owing to the foreign exchange ratios that lowered the average prices.
However, this was not the case with Apple. This suggests that for Apple brand loyalty matters the most, and the analysts were looking at the wrong number, Cramer says.
‘Service revenue’ is one metric that can quantify the value of brand loyalty. An astounding growth of 23% on year over year basis was seen in the revenues from installed base that included the money paid for iTunes, music, app store licensing, service parts, iCloud and Apple Pay.
“That is the number we need to key in on, not how many devices they sell,” Cramer said.
Cramer believes that Apple Inc. customers will not switch to any other products because of the brand loyalty. This probably means that peaking iPhone sales should not be a matter of concern for Apple.
“By this time next year, it wouldn’t shock me if that service revenue number becomes the key metric, especially with the iPhone 7 right around the corner,” Cramer said.
In pre-market trading today, Apple shares were up 0.49% at $93.91. Year to date, the stock is down over 11% while in the last one-year, it is down over 17%.