The interesting thing about Apple (AAPL) right now is that Mr. Market has already decided to issue his verdict: Apple is now becoming the next bellwether blue-chip, capable of generating tons of cash flow without the ability to reinvest it back at similar rates of return.
While I am not an Apple shareholder -- not yet anyway -- it seems to me that the market has overreacted of late. Apple, dare I say, now looks more like a value stock with attractive growth prospects.
Apple's quote at 10x earnings -- which, if you can believe, is a 33% discount to Microsoft's (MSFT) earnings multiple -- is indicative of just how a much of a cult stock Apple has become. Until the selloff, most Apple owners were investors at any cost. Apple was the must-own stock, irrelevant of price or valuation. In fact, according to The Wall Street Journal, large-cap investment funds had allocated 7% of assets to Apple before its current selloff.
Apple is currently falling victim to investor bias. Investors look at Dell (DELL), Cisco (CSCO) and, to a lesser extent, Research In Motion (RIMM), and conclude from Apple's "lackluster" quarter that this the beginning of the end of one the great growth stories. They draw that same conclusion as they look to Microsoft and see that it can only generate 40% on equity on the small portion of its capital that it allocates to Windows. Investors also continue to hone in on the iPhone as the only possible way that Apple can have a bright future.
Investors should consider the following. Apple currently has an installed base of about 200 million customers, with an approximate market share of 20% of the global smartphone market. That means the world has an installed base of 1 billion smartphones -- which leaves market potential of about 5 billion people who are currently using mobile phones other than smartphones. That's why I recently opined that Apple would give some margin points by making a cheaper iPhone in order to capture a big chunk of this population of five billion -- a move that could be enormously profitable.
Also, Apple's 200 million customers are loyalists. Find me an iPad owner, and it's a near certainty that, if this person has a smartphone, it's an iPhone. I still hold to my view that the iPad will become another iPhone-like home run, as iPad sales continue to grow vigorously.
More intriguing is the potential market for new Apple products. I know that I was an iPhone user before the iPad was released, and when it came time to buy a tablet, it wasn't even a question that it would be an iPad. We know that Samsung is Apple's nemesis. We also know that Samsung is a heavy hitter in the television market. Prior to his death, Steve Jobs talked about an Apple television -- not the existent software part, but the actual television. At the outset, such a product would already have an installed customer base of more than 200 million who would be very likely to purchase an Apple product for their next TV purchase.
In the end, as it always is for us value folk, it's all about the price-value relationship. At $450 a share, or $450 billion, you are getting a company with currently about $1 billion a week in cash flow. Apple's current enterprise value of $390 billion implies that it is now trading for around 9x EV/FCF. That's certainly a value multiple in my book, and it's being assigned to a company that I believe has not stopped growing -- not by a long shot.