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Are Apple Shares Really Mispriced?



Are Apple Shares Really Mispriced?

The price of Apple shares continues to puzzle pretty much everyone. As it is a high-profile company that is considered a “brand giant,” it's expected that everyone would assume that its shares command considerable cost. Surprisingly, this does not seem to be the case and we can't seem to decide whether it's a good thing or a bad thing.

The Finer Points of Pricing Stocks
In Apple is grossly mispriced, a feature published on the investment research platform Seeking Alpha on April 1, 2016, buy-side analyst Erik Bergseng noted, “No matter which way you cut it, Apple (NASDAQ:AAPL) is grossly mispriced.” He added that “even if we assume the worst and revenues stagnate or even slightly decline,”  the fact remains that Apple “is still a phenomenal investment because it is so pessimistically priced.”

Before we delve further into why Apple stocks are mispriced, let's take a quick look at the metrics that are employed by financial analysts to relate price-to-fundamental financial data. An Investopedia entry lists the following:

Price-to-earnings ratio (P/E ratio) – This measures the price of a stock relative to annual earnings per share (EPS) generated by a company.

Price-to-book (P/B) ratio – This is used to show how much a company’s valuation is generated by its book value, which refers to the value of a asset as entered in a company's books.

Enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio – This is used to compare companies with different capital structures or capital spending requirements. This is especially useful in assessing firms that operate in different industries.

Yield analysis – This is is commonly employed to express investor returns as a percentage of the price paid for a stock. This “allows the investor to conceptualize pricing as a cash outlay with potential for returns.” Investopedia further explained: “Dividends, earnings and free cash flow are popular types of investment returns and can be divided by the stock price to calculate yield.”

In his analysis, Bergseng highlighted the difference in P/E between Apple and the S&P 500. He stated, “Again, we see the P/E disparity here is making 10-year lows. In other words, Apple has not been so pessimistically priced relative to the market in the past 10 years.”

Long-running Issue
Bergseng's observations aren't anything new. For at least a couple of years now, other industry pundits have pointed out the baffling detail.

In 2013, Suzanne McGee — in her article in The Fiscal Times — pointed out that the price of Apple shares have not soared even when the company products are practically flying off the store shelves. “In spite of all that enthusiasm – or downright mania – Apple still changes hands for less than $500 a share, well below its record high of nearly $700, and is trading at about 12 times trailing earnings,” wrote McGee.

Another Perspective
However, not everyone is convinced that Apple shares are mispriced. Bram de Haas, in his Seeking Alpha article, Apple: Be Careful, stated that he was presenting a “rebuttal of a fellow contributor's dangerously optimistic view of Apple's future.”

De Haas noted: “The past decade of Apple's performance and the growth rate it resulted in should not be mistaken to be easily repeatable or as a normal kind of growth rate.” He added, “Ten years ago Apple started its global expansion, now nearly everyone who can afford an iPhone has one. The iPhone, a miraculously successful product, was introduced in 2007. For the first time since that introduction there is widespread talk of [the] peak iPhone.”

In other words, De Haas is asserting that there will come a point when Apple “starts to lose scale and/or is forced to introduce a larger number of products to generate the same amount or even less revenue.” He concluded, “The market is correctly anticipating free cash flow falling.”

Future Projections
In any case, Mike Colagrossi, an analyst at, anticipates a fruitful 2016 for Apple. He explained, “As an incredibly successful technology company, it’s hard to imagine that Apple's price-to-earnings (P/E) ratio is where it is. Apple had a run in the $130 range earlier in 2015, but by the end of the year, share prices went down to the $105 level. 2016 could be a year that sees share prices rising as opposed to the stagnant year Apple had in the stock market in 2015.”

Colagrossi went on to say, “Apple needs to look towards the future and into a new market. As smartphones become more commonplace and saturated, it needs to find the next best thing. This could be virtual reality.” Aside from that, he also dicussed the possibility of Apple buying electric car maker Tesla or GoPro.

Moreover, Colagrossi said that Apple “can focus even more on entering these new non-Western markets and selling iPhones there.” The company's other option, he said, is “to increase its reach on new products such as the Apple Watch and Apple TV.” The key, he emphasized, was for Apple to develop “products that entice consumers to need iPhones.”

With all the heavy lifting that needs to be done, we understand why the company isn't losing sleep over its famously mispriced shares. Maybe we don't have to tag it as a good thing or a bad thing. Maybe that's just the way it is.

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