The chart below shows how Apple Inc. (NASDAQ:AAPL) shareholders got the short end of the stick over the past year.
Image Source: Google Finance
By all accounts, Apple Inc. (NASDAQ:AAPL)’s stock performance was the bottom of the heap, whether compared to its peers, such as Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN), or the indices such as the NASDAQ Composite (INDEXNASDAQ:.IXIC) or the S&P 500 (INDEXSP:.INX).
Things might well have been worse but for Mr. Carl Icahn’s entry into the stock and his strenuous efforts to persuade Apple Inc. (NASDAQ:AAPL) management to counter the undervaluation of the stock with larger buybacks.
Apple’s “irrational undervaluation” per Icahn
Carl Icahn wrote to Apple Inc. (NASDAQ:AAPL) in October 2013 asserting that the stock was undervalued and that a $150B buyback was in order. Here is an excerpt from the letter:
“When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly…The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future. With such an enormous valuation gap and such a massive amount of cash on the balance sheet, we find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 Billion tender offer (financed with debt or a mix of debt and cash on the balance sheet).”
Wall Street’s Apple disconnect
This interesting mosaic of charts shows how Apple Inc. (NASDAQ:AAPL)’s financial parameters are starkly superior to those of peers Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG):
So, what ails Apple?
Probably, its growth prospects are currently not up to scratch compared to those of Amazon and Google. It is equally likely, however, that the market is placing a disproportionate premium on growth.
Netflix, Inc. (NASDAQ:NFLX) is a case in point. According to this article in Forbes, the video streaming service is currently trading at 300 times earnings. Compared to this, Apple is available at a measly PE of 14 and pays a dividend yield of 2.1% to boot.
“Believe it or not, if Apple were awarded the same earnings multiple as Netflix, Inc. (NASDAQ:NFLX), the consumer electronics superstar would change hands at nearly $12,000 per share,” says contributor John Buckingham.
Could Icahn repeat history with Apple?
Note that Netflix, Inc. (NASDAQ:NFLX) was one of Icahn’s fabled deals. He bought a 9% stake in the company and earned a 457% gain in just 14 months.
This is only possible when a company is fundamentally rerated by the market and the investor spots the latent value in the stock before the market does.