The Valuation Expert Who Dumped Apple Near The Top Now Says It's Almost Definitely Undervalued

aswath damodaran

Photo: Bloomberg

Aswath Damodaran, the legendary NYU finance professor, started accumulating shares of Apple in 1997.And just under a year ago, he dumped the stock.

“I sold because I’m very uncomfortable with the other people who are holding Apple shares right now,” he said in an April 2012 appearance on Bloomberg Television. “The new investors of Apple scare me.  They’re momentum investors.  They’ve shifted the game. Once stocks become a momentum play, intrinsic value goes out the window.”

Apple was trading above $600 per share back then.  And today it’s right around $440.

And in a new blog post, Damodaran has revealed that he is bullish once again.

“Based on my estimates, and they could be skewed by my Apple bias, at its current stock price of $440, there is a 90% chance that the stock is under valued,” he writes.

He characterises himself as a “value optimist” on the stock.  From his post:

The Value Optimists: This group believes that Apple is a bargain at $440 and that its true value is much higher. Some, in this group, base this judgment on simple comparisons. At a market cap of $413 billion, with a cash balance of $120 billion and net income of $42 billion, they note that Apple is trading at roughly seven times earnings, cheap in a market where the median PE ratio is about 16. Some are basing their views on cash flow based valuations and I am one of that group, as you probably already know from my post at the end of 2012. In that post, I valued Apple at $609/share and the latest earnings report barely changes that estimate. I did a follow up simulation, bringing in the uncertainty about my estimates about revenue growth(-2% to +14%), margins (25% to 35%) and cost of capital (11%-14%) into the mix, with the following outcomes:

damodaran apple

Photo: Musings on Markets

Damodaran warns that being a value optimist won’t be easy. “If, like me, you are [a value optimist], you are being tested mightily now, torn between a belief that the stock is under valued and a market that does not seem to care.”

Apple investors will be faced with gut check and a confidence check, he writes.

Damodaran offers a bunch of advice on what Apple investors should do.

Read more at Damodaran’s Musing on Markets blog >

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