Unless you’ve been in a long Rip Van Winkle type of a slumber, you would know that Apple (AAPL) has become one of the most "unappealing" stocks on Wall Street, having pulled back to as low as $106 a share on Dec. 28, 2015, way below its 52-week high of $134.54.
That’s an unbelievable and disheartening turn of events for the faithful among the bulls, particularly because Apple’s stock has been a robust gainer since trading as low as $7.17 a share 10 years ago. It managed to pull out of that subterranean level, and steadily climbed to a high of $119.75 by 2014, and earlier this year hit a new all-time high of $134.54.
However, Apple lost steam in recent weeks as disenchantment grew among analysts who have gotten used to expecting impressive growth data and miracle products from the company that has already produced a line of electronic marvels that transformed it into a global brand. Apple's own success has made it hard for it to come up each year with innovative, sleek yet simple functional devices, such as the iPhone, and the iPad.
So sustaining its swift growth became an unexpected concern, as analysts expressed impatience over Apple’s apparent lack of energy in responding to their lofty expectations. It’s one of those “what-have-you-done-for-me-lately” syndrome, so many of the once passionate bulls began to have doubts about Apple’s future fuel and stamina for growth.
But not a few intrepid investors saw opportunity rather than disappointment in Apple’s unusual and unseemly behavior of weakness, based mainly on their sanguine appraisal of where Apple is heading.
Among them is Angelo Zino, analyst at S&P Capital IQ, who continues to rate Apple as a “strong buy,” with a 12-month price target of $150 a share. Such unwavering bullishness, says Zino, “primarily reflects Apple’s compelling valuation (trading at less than 10 times, excluding net cash), and our favorable view on leasing programs by carriers/AAPL, and positive outlook on potential product offerings in 2016 (i.e. new iPhones and TV streaming).” And several savvy investors have turned even more bullish on Apple as they envision a world with “ubiquitous computing,” where multitude of objects would connect to one another in a vast network that would service people’s everyday needs. A simple example already in use, is a home thermostat that can be regulated remotely by a smartphone.
Stephen Leeb, president and chief investment strategist at Leeb Asset Management, says that vision, now dubbed as “the Internet of things” (IOT), or alternatively the “Internet of everything (IOE), is “moving toward reality in which Apple would be a central, major beneficiary.”
So to Leeb, who also edits a market newsletter called The Complete Investor, the "lackluster performance of Apple’s stock has made it even more deeply undervalued than before.” First of all, smartphones will be at the heart of IOT/IOE and the “smart cities” it will spawn, says Leeb, and “Apple’s commanding share of the best apps makes it one of the surest beneficiaries of what may be the fastest growing area of the next generation.”
Apple’s indispensability to IOT/IOE, he adds, will make it essential to running the smart cities of the future, which Leeb believes will probably start in China. The inexorable march to smart cities virtually ensures that Apple, whose mobile brand is the strongest in the world, “will see several percentage points added to consensus estimates of its long-term growth, making it even more undervalued than it appears,” argues Leeb.
He notes that Apple, by a wide margin, is No. 1 in the so-called premium market, with the best applications for mobile devices appearing first, and sometimes solely, on Apple iPhones.“ Particularly relevant is Apple’s outsized success in bringing its products to China, which makes it a good bet that as China continues to urbanize and moves to create smart megalopolises, it will rely on Apple’s devices, says Leeb.
China plans a Beijing megalopolis linking about 130 million residents together, which would require hundreds of millions of connections that, among other things, will keep residents informed about everything, from train schedules to traffic patterns and environmental conditions. Leeb notes that Apple promises to be at or near the center of these connections. Beijing will be the first megalopolis, but it appears certain it won’t be the last.
But even forgetting about IOT/IOE, Apple is definitely cheap, argues Leeb. “With free cash flow yield of about 10% and a price-earnings to growth (PEG) ratio of 1.2 based on current assumptions, the stock is way undervalued,” he asserts. And when you factor in the impact on Apple of IOT/IOE, which Leeb figures could raise the company’s growth rate as high as the mid-to-high teens, Apple’s PEG drops to nearly 0.8, estimates Leeb.
So putting it succinctly, “we expect Apple will remain a market leader for many years to come,” predicts Leeb.
