Why Apple may be undervalued by 40%

Apple (APPL) investors would seem to have ample reason for cheer heading into the holiday season.

The company boasts a market value of $653 billion, iPhone sales are robust and the stock is up 7% on the year as of November 18.

Bullish Goldman

But what if the stock is undervalued…on the order of 40%!

That’s exactly what Goldman analyst Simona Jankowski argued this week in a much-discussed, new report on Apple.

Apple Logo

Goldman (GS) has a 12-month price target of $163 per share, up about 40% from Apple’s close of $117 on November 18.

Service Revenue

In a conviction buy report, she argued that investors are wrong to value the maker of iPads, Mac computers and other gadgets as a hardware company.

Increasingly, Apple is really a services company that sells content and services that generate a lot of steady cash that over time will shift investor attention away from hardware upgrades.

Profit Surge?

According to her analysis, average revenue per user is currently $42 per month.

The chart below published in the Financial Times details Goldman’s assumptions.

But team Goldman thinks that per-user revenue has the potential to actually reach $153 a month.

Big Spenders

Consider the math here: While iPhone sales are slowing, Apple’s installed base of users is 500 million now and will rise to 700 million by 2017, according to Goldman.

This a loyal following that spends more on average than Google’s Android users, the investment bank notes.

Valuation Rethink

Goldman’s Jankowski argues that Apple shouldn’t be trading at a steep discount — on a price-to-earnings basis — to Facebook (FB), Google (GOOG) and Amazon (AMZN).

Apple trades at a p/e ratio of 12.30, versus 107 for Facebook and 906 for Amazon.

Or as the Goldman team puts it:

“We expect Apple’s growth to become less sensitive to the success of individual hardware upgrade cycles, as the consumption of content and services within the Apple ecosystem makes hardware upgrades less volatile and more predictable.”