(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)

Apple Inc.'s (AAPL) stock has traded at a discount to its ultra-mega-cap peers for years based on the perception that Apple can't deliver the same growth rates as Google parent Alphabet Inc. (GOOGL) and Microsoft Corp. (MSFT). If Apple traded at the same forward valuation as the S&P 500, it would sell at nearly 19 times forward earnings. And it would trade at almost $210 a share, 31 percent higher that its current valuation of roughly $825 billion, adding $256 billion to its market cap.

Apple is trading at just 14.5 times fiscal 2018 estimated earnings of $11.02 a share – an increase of almost 23 percent from fiscal 2017 estimates of $9. According to Ycharts, 2018 estimates have been steadily rising since the start of 2017, having increased by nearly 9 percent since the beginning of the year from roughly $10. Revenue is expected to grow by 15 percent to $263.45 billion in 2018, and implies a price-to-sales ratio of roughly 3.

Adjusting for growth, Apple trades at only 0.63 times forward earnings. If Apple was trading at 19 times, or next year's earnings, it's still a discount to growth, but in-line with the S&P 500. Shares would be at $210, taking the stock's valuation past $1 trillion.

AAPL Chart

AAPL data by YCharts

Microsoft Earnings Expected To Decline

For fiscal 2018, Microsoft is expected to grow revenue by only 8 percent, to $104.75 billion, while earnings are expected to decline by 3 percent to $3.21 a share based on data from YCharts. The software company trades at 24 times 2018 earnings estimates, almost double Apple's earnings multiple. Meanwhile, its price-to-sales ratio is nearly 5.7, again higher than Apple's.

Alphabet More Expensive Adjusted For Growth

Alphabet is closing in on $700 billion in market valuation. It offers revenue growth of 17 percent for 2018, and EPS growth of 31 percent yet trades at 2018 forward PE of 25, and PS of nearly 6.5. That equates to a one-year forward price adjusted growth rate of 0.80. Apple again trades at a cheaper valuation than Alphabet when adjusted for growth and based on revenue.

Can't Argue Its Because of Margins

Apple also has better operating margins than Alphabet and Microsoft over the trailing 12 months. (See also: Apple Leak Reveals Major New iPhone Feature.)

AAPL Operating Margin (TTM) Chart

AAPL Operating Margin (TTM) data by YCharts

This suggests that Apple receives an unfair discount to its two closest ultra-mega-cap peers. If Apple received a proper valuation, then its stock would likely trade at levels closer to $1 trillion than $825 billion.

Apple shares are stuck in a battle of perception versus reality. The perception is that Apple can't continue to grow its revenue and earnings at a sustainably high rate, so the market discounts its valuation. However, in reality, Apple is able to grow in-line or better than its peers Alphabet and Microsoft, which are also more expensive than Apple on an absolute and adjusted-for-growth basis.

Apple has been able to deliver consistently, and continues to push the envelope regarding technology and its ecosystem. It does just as well as Microsoft and Alphabet and deserves a higher valuation and multiple.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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