Is Apple Massively Undervalued Relative to the Market?
Activist Investor Carl Icahn: Apple is Highly Undervalued
Icahn strongly feels that Apple is undervalued
Activist investor Carl Icahn appeared in a recent interview with the Fox financial television program Wall Street Week. Icahn argued that while the S&P 500, with reported earnings growth much lower than that of Apple (AAPL), trades at a price-to-earnings ratio of more than 18x, Apple trades at a price-to-earnings ratio of 15.7x.
This value for Apple could be even lower without taking into account its significant cash holdings of ~$180 billion. This implies that the stock could be highly undervalued by the market and has significant potential to outperform the market over the longer term.
Icahn’s take on Apple stock
According to Carl Icahn, Apple’s stock should be trading at $216, much higher than its recent value of $126. At $216, the market capitalization of AAPL would exceed $1 trillion, which equals ~8% of the GDP (gross domestic product) of the US and ~14% of the GDP of China. The beta of AAPL is 0.91, which implies that the stock movements are in line with that of the market. At some point, when the market catches up to this notion, that beta could change.
Investors who wish to gain exposure to AAPL could invest in the iShares US Technology ETF (IYW), which has 18.8% of its holdings in the stock. Apple is also part of the PowerShares QQQ Trust (QQQ), with an exposure of 15.41%.
The next part of this series evaluates the performance of Apple against relevant benchmarks. Plus, the top holdings of Carl Icahn in CVR Energy (CVI), eBay (EBAY), and holdings in technology stocks Nuance Communications (NUAN) and Mentor Graphics (MENT) are compared with relevant sector benchmarks such as the Technology Select Sector SPDR Fund (XLK).
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