Everybody knows the Apple (Nasdaq:AAPL) story. The iPhone is everywhere and Apple seems to be one of the only companies to make money in tablets, notebooks and consumer electronics retailing. With upwards of 50 sell-side analysts covering Apple and institutions holding 71% of the shares, and online financial commentators going to the Apple well time after time for click-throughs, it would seem startling if there was anything unexpected to the Apple story. Yet, despite all of this, Apple shares actually look undervalued on even rather conservative expectations.

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Plenty of Growth Drivers
Even with the iPhone already being the share leader in smartphones, Apple can reasonably expect even more growth here for many years. Smartphones are still not the dominant cell phone type in North America, let alone the rest of the world. While Samsung, Google (Nasdaq:GOOG) and a revived Nokia (NYSE:NOK) will try to chip away at Apple's business, underlying market growth should keep the phone business moving forward for many additional years.

Moreover, Apple has numerous shots on goal left to take. Everyone seems to be expecting an Apple TV in the relatively near future, with analysts and industry observers speculating on what sort of device it will be and how much of the set-top box it will integrate into the TV. Based on what the iPhone did to Motorola and what the iPad did to computer names like Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ), Cisco (Nasdaq:CSCO) ought to be more than a little worried right now.

There's likely even more; the company's iTunes Store has already been a very successful means of selling music, apps and so on. Is it so much to think that an Apple TV that is designed around broadband internet would be a massive threat to the likes of Netflix (Nasdaq:NFLX), Coinstar (Nasdaq:CSTR) and the pay-per-view franchises of major cable operators like Time Warner (NYSE:TWC) and Comcast (Nasdaq:CMCSA)? For that matter, this could challenge the entire underpinning of the cable TV industry, if Apple can somehow work out content licensing agreements that would allow it to offer individual shows on an a la carte basis.

Apple is Sneaky
For all of the hype about Apple's excellent design aesthetics and focus on harmonizing hardware and software, Apple is also good at sending its rivals on wild goose chases. Tablets have been white elephants for almost everybody but Samsung - the offerings from Dell, HP, and Research In Motion (Nasdaq:RIMM) have gone nowhere, despite millions upon millions invested in R&D and working capital. Likewise, Apple has lured Google into buying Motorola, drawing that company away from what it has historically done. (To know more about R&D and how it affects the income statement, see Understanding The Income Statement.)

Why does this matter? Well, if Apple can force its would-be rivals to waste time and money on simply matching what Apple already has, what are the odds that these companies are going to look ahead and make the big leaps that actually threaten Apple's thought-leadership?

Not all Sweetness, Though
Apple is not a perfect or bullet-proof company. No company has stayed one step ahead forever and eventually Apple's rivals will close the gap enough to apply real pressure to pricing and margins. Moreover, while revolutionizing TV and on-demand media should be a major opportunity, there may well not be too many hardware markets left for Apple to shake up. That means more reliance on the media market and will put Apple in the position of having to negotiate with the likes of Disney (NYSE:DIS) and Sony (NYSE:SNE); these studios don't often lose. Moreover, who's to say that the cable companies (which are also major internet service providers) won't find some way of hobbling Apple's potential digital media aspirations?

The Bottom Line
I'm suspicious of stories that look too good to be believed, but Apple really does look cheap. Even if I only assume high-single digit revenue growth and assume that free cash flow margin gets cut by one-quarter over the next five years, the shares look at least 30% undervalued. That's a compelling valuation, given the conservative assumptions.

All of that said, value-oriented investors should realize that sentiment is a huge part of the Apple story and a lot of investors may well abandon this name at the first sign of real weakness, setting up the downside possibility of a value trap. Still, in terms of risk and reward, Apple looks worth a bite. (For related reading, see What We Can Learn From Steve Jobs.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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