Even Without Growth, Apple Should Be Worth More

Image source: Apple.

The first analyst question on Apple's (AAPL 0.22%) last earnings conference call was telling.

Goldman Sachs analyst Simona Jankowski asked Tim Cook and Co. how Apple views itself going forward. "Is it as a growth company, or is it a more mature tech company?" she wondered. Jankowski was curious if this self-perception would also affect Apple's acquisition strategy going forward, but it also speaks to the timeless debate of growth stocks versus value stocks.

Fundamentally, Apple has enjoyed more than a decade of blistering growth, and now that it's revenue base is so large it stands to reason that growth will slow and the company will mature and enter "value" territory. While "growth" and "value" are somewhat overgeneralized terms, it doesn't take much to realize that Apple should be worth more even in the absence of growth.

Looking for value
Valuation multiples are often the market's reflections of a company's prospects going forward. That includes in terms of both top-line revenue and bottom-line earnings. We do know that Apple is able to deliver earnings growth through its highly accretive share repurchase program, but investors don't seem satisfied with that.

While I don't think it's necessarily appropriate to assign Apple a market multiple comparable with the S&P 500 for valuation purposes, which was a mistake that Carl Icahn made, the current valuation just seems way too cheap to ignore. The market is falling into the old habit of valuing Apple like a hardware company. Consumer electronics hardware companies don't get much respect in general because most are plagued by low margins and low customer loyalty.

Looking at it a different way
Some have tried valuing Apple using different frameworks, like comparing it to services companies or subscription models. Considering Apple's incredibly high loyalty numbers and reliable recurring revenue, I would even go as far as to say that Apple's business is comparable to some consumer staples companies. Many Apple customers find their devices indispensable (particularly iPhones), and switching PC or smartphone brands isn't even a question when it comes time to upgrade so Apple knows that it can count on the repeat business. These are both characteristics that Apple shares with consumer staples companies.

Yet somehow, consumer staples stocks that are putting up negative growth are able to command higher multiples.

Data source: Reuters. TTM = trailing-12-month.

Consumer staples are actually hitting record highs right now. The Consumer Staples Select Sector SPDR (XLP 0.04%) continues to push into uncharted territory as consumer sentiment recovers and broader unemployment trends lower.

Of course, this comparison is limited because consumers technically don't need their iPhones like they need Tylenol or laundry detergent. But the point here is that despite many similarities in terms of consistent cash flow, Apple's valuation is significantly lower than other consumer-oriented brands.

Even if we were to assign Apple an earnings multiple of 15 (still a discount compared to the market's 23.8), that would imply over 40% upside from current levels. Apple's average P/E over the past two years has been 14.4, so it's not unreasonable for the company to trade at 15 times earnings. Apple definitely looks undervalued right about now.