Are Apple Shares Undervalued?

Apple Inc. (NDAQ: AAPL) may remain a strong stock fundamentally, but selling continues to plague shares. Analysts are concerned that the current economic crisis will hurt sales in 2009 and lowered their forecasts for the technology company. Apple’s actual sales have shown no significant declines while the company has beat analyst esimtates every quarter since 2005. So, is Apple a good deal? And if so, how can bullish investors place a long-term bet on the stock while surviving the unjustified selling?

Analysts covering Apple stock are making several assumptions about the future when lowering their forecasts. First, they assume that sales will be flat across all of Apple’s product lines, including Macs and iPhones that have performed well thus far. Secondly, they often do not fully take into account Apple’s large amount of deferred revenues that will automatically be realized in 2009. These revenues top $3 billion and are realized from Apple’s subscription services, such as the iPhone and Apple TV.

Apple’s balance sheet also remains very attractive. The firm has no debt on its books with $24.49 billion in cash - or roughly $27.50 per share. Apple is not only well capitalized, but also generates strong cash flows from operations that showcase its ability to remain well capitalized going forward. Finally, given its low valuation and strong growth, the stock trades with a PEG ratio of just 0.86, which suggests that it is substantially undervalued given its growth rate.

So, how can bullish investors capitalize on this apparent undervaluation? The answer may lie in long-term options called LEAPS, which enable investors to own the rights to purchase a stock for a fraction of the cost of purchasing the underlying stock outright. Currently, investors can purchase the right to buy 100 shares of Apple stock at $100 per share anytime between now and January 2011 for just $3,105 down compared to $8,941 down purchasing the underlying stock. Ticker Symbol: VAA AT.

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