This Tech Stock Really Is a "No-Brainer"

This Tech Stock Really Is a "No-Brainer"

Noted investor Carl Icahn is no stranger to controversy. Investors likely remember his recent battle with fellow hedge fund manager, Bill Ackman, over nutritional supplement maker, Herbalife. Ackman took the short side of the bet several months ago and paid dearly for it. Icahn was right about Herbalife (at least for the time being), and now he's moved on to another company-- technology juggernaut, Apple .

Apple's widely hyped iPhone announcement fell flat, and shares dropped 5% the same day. Icahn quickly stepped in, giving an interview on CNBC in which he disclosed he had purchased more shares of Apple, adding to his already sizable position. Is Icahn right about the house that Steve Jobs built?

A supposed "no-brainer" investment
That's how Icahn described Apple at its current valuation, and it's extremely difficult to find fault with his argument. Icahn referred to the stock as very cheap, and indeed, Apple does appear to be one of the most cheaply valued stocks. Even among technology stocks, Apple looks like a bargain.

The S&P 500 trades for a trailing P/E multiple in the high teens, and even stodgy fellow tech giant, Microsoft trades for 12 times its adjusted fiscal 2013 earnings per share. Apple exchanges hands for just 11 times trailing earnings. This is despite the fact that, while Microsoft posted 5.5% revenue growth in its most recent fiscal year, Apple generated 11% revenue growth through the first nine months of its current fiscal year. Also, consider that Microsoft has a much more heightened risk profile due to its continued tethering to the personal computer.

More catalysts than meet the eye
Apple's business collapsing is simply unrealistic, and the market is also completely glossing over the potential partnership with China Mobile , the largest telecommunications carrier in the world. China Mobile serves 700 million subscribers, and to this point, has not made the iPhone or any other Apple products available to its customers. A partnership with China Mobile could be a very lucrative opportunity for Apple, but clearly the market is unwilling to give it any credence whatsoever.

Plus, investors were wrong to hype up Apple's recent iPhone announcement in the first place. These aren't the new products the market was hoping for, nor were they supposed to be. The iPhone 5S will indeed have a few interesting new features, such as a fingerprint scanner and an 8-megapixel camera. The iPhone 5C is a cheaper model of the iPhone 5. Quite simply, these models are the preface to market penetration in new geographies like China, India, and South Asia, where Apple can secure millions of new customers in its ecosystem.

In the end, Icahn is right
Apple appears to be as close to a no-brainer as a stock can get. The market pessimism over the company's future has gone way too far. At its current valuation of 11 times trailing earnings, Apple's iPhone sales would have to fall off a cliff for investors to not earn at least a reasonable rate of return going forward. Sure, it's unlikely Apple will repeat the same type of growth trajectory that propelled it to the top spot among the world's most valuable companies by market cap. But, calls for Apple's demise are far too irrational, and at the same time, there's no denying the math.

Apple's gigantic buyback, in addition to a hefty 2.7% dividend yield plus likely double-digit dividend growth over time means investors have multiple layers of safety embedded into Apple's already discounted valuation. In total, Apple plans to return $100 billion to shareholders over the next three years through a combination of dividends and share buybacks. And, let's not forget the $147 billion in cash, equivalents, and marketable investments on its books, implying an even bigger margin of safety. There's simply a far too compelling risk-reward proposition to not own shares of Apple. While I don't always agree with Uncle Carl, but on this particular stock, I think he's right on the money.

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Robert Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, China Mobile, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published