123rf

There are many reasons to suggest that Apple (NASDAQ:AAPL) stock is undervalued. Apple’s PE has declined from over 17 in April to current PE of 12.7 while its future prospects remained unchanged if not improved. Its relative valuation too appears cheaper than its competitors. In the current post and next we will go through ten reasons why Apple stock is under-priced.

#1: Apple’s implied EPS growth rate of ~9.6% is not only too low, it is ~64% below Apple’s 4-year average EPS growth rate.

Apple’s estimated EPS growth rate is way below the company’s historical five year average growth rate. Yahoo! Finance, under Analyst Estimates, estimates Apple’s EPS to be $9.85 this current year and to grow to $10.80 next year. Implying a 9.6% EPS growth rate.

But Apple has grown EPS by an average of 26.57% in the last 4-years (59.75%, -9.98%, 13.56 and 42.95% from 2011-2012, 2012-2013, 2013-2014 and 2014-2015 respectively) as shown in the Figure below.

Source: FY Ended September 26, 2015

This means that Apple’s expected EPS growth rate of 9.6% is ~64% below Apple’s historical 4-year average growth rate of 26.75%. Expecting a company’s EPS growth rate to decline by 64% would make sense if that company was facing imminent and detrimental headwinds. But this is not the case for Apple.

Apple recently entered new markets with Apple Pay  and Apple Watch. All these new products are sources of potential revenue growth. In addition, Apple’s Q4 2015 results brought in a record revenue of $51.5 billion and net profit of $11.5 billion, with profit up 31%. This shows that Apple’s growth potential is still alive and strong, and to expect a very low growth rate from a company that has consistently performed really well seems misguided.

#2: Apple has had an average of ~ 35% growth rate in profit margins in the last 5-years. Considering the size of the firm, Apple should be given credit for being able to be defined as a growth company for so many years.