Chart of the day, Apple valuation edition

By Felix Salmon
November 28, 2011
Andy Zaky at Bullish Cross has a great post on Apple's valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple's earnings today, compared to just two years ago.

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Andy Zaky at Bullish Cross has a great post on Apple’s valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple’s earnings today, compared to just two years ago. Back then, it was worth $32; now, it’s worth just $13. In the eyes of the market, Apple earnings are worth less than those of Cisco, Comcast, IBM, or AT&T, and are worth just 13% of the earnings of Amazon.

All of which raises the obvious question: why is Apple trading at such a seemingly depressed level? I have a few ideas, none of which are particularly compelling.

  1. It’s run out of buyers. The Apple bull run has been going on for so long, at this point, that anybody who wanted to buy it has bought it already. And they’ve done pretty well by doing so. If they want to rebalance so that they keep their Apple holdings constant as a percentage of their total portfolio, they’re more likely to be selling than they are to be buying.
  2. We’re all long Apple already. Apple is now firmly ensconced in its position as one of the two most valuable companies on the US stock market, in a world where ETFs and index funds are only getting more popular. As a result, if you’re long the S&P 500, you’re long Apple in quite a big way. And a large amount of the trade in Apple is going to be index-arbitrage trading. This is inevitably going to increase the correlation between Apple and the S&P 500. And when the S&P 500 has much lower earnings growth than Apple, that’s going to act as a drag on Apple’s share-price growth.
  3. The headline share price is high. This shouldn’t matter, but it does. Small investors feel a bit weird about spending $2,500 on Apple stock and getting the grand total of seven shares in return. And the high share price sends a message to bigger investors, too: it says that Apple isn’t in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks. Indeed, the market shouldn’t even expect a dividend any time in the foreseeable future, despite the fact that Apple clearly has more cash than it knows what to do with.
  4. The headline market capitalization is high. When a company is worth $340 billion, a 10% rise in the share price means that the stock market has created $34 billion of new wealth. Which is harder than creating $3 billion of new wealth.
  5. The appeal of the mean-reversion hypothesis. Apple can’t go on increasing its rate of earnings growth forever; indeed, it can’t even sustain its current level of earnings growth very long. It’s so big, and has come so far, and is making so much money, that at some point the only way to go is down. This is true on a conceptual level, but I don’t think it’s true on a practical level: Apple’s market share is still pretty small in the US, and positively tiny in the rest of the world. There’s a lot of growth potential left in this company, as smartphones increase their global penetration and as more people move from Windows to Macintosh.
  6. Steve Jobs is dead. Apple’s p/e ratios started shrinking at about the same time that Jobs did, and all the hagiographic attention on how unique Jobs was only serves to remind us that he’s not around any more. If the next generation of Apple products is a success, people will still give Jobs the credit, and worry that Tim Cook won’t be able to replicate Jobs’s achievements. It’s going to take a long time before Cook can truly own the company and come out from Jobs’s shadow; in the meantime, investors are naturally going to worry that the glory years are over.
  7. Apple’s earnings come from the frothiest, most disposable part of consumer income, which is the first part of consumer spending to go away if and when the economy heads south. As such, Apple’s more vulnerable to an economic downturn than most of its peers.
  8. There isn’t a real bear case for Apple: the closest thing I can find is all technical-analysis astrology. And the way that markets work, stocks are much more likely to rise when people are bearish than when they’re bullish. No one seems to think that Apple is actually overvalued; indeed, analysts are ratcheting up their earnings forecasts at an astonishing pace. Here’s a table from Bill Maurer:

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Estimates are up 12% over the past 90 days for the first quarter of 2012, and they’re up 7.5% over the past 90 days for the full year. This also helps explain the compression in forward p/e ratios.

What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers.

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Comments
45 comments so far

One possibility is that all the others you cite are overvalued.

Posted by VinnyCatalano | Report as abusive

This doesn’t seem all that surprising. Where is the long-term growth going to come from? Are they going to just continually innovate new platforms at ever-higher price points forever? Or will their massive iPhone and iPad profits be hampered by disruptive competition from Android and Windows phones and Amazon-style tablets (not to mention market saturation)?

Today is the best of all possible worlds for Apple and it makes no sense to price in an indefinite continuation of current conditions.

Posted by right | Report as abusive

Also, the comparisons listed (Cisco, IBM, etc.) are not necessarily good comparisons, for all they have in common is that they are in the Info Tech and Telecom area with varying risk factors, growth rates, etc.

Then there’s the harder to quantify aspects of each company – management, products, marketing, etc. – with varying levels of value.

Last point: as for the technical analysis “astrology” you cite, there is some justification for skepticism re the discipline but I would not rule out all aspects of technical analysis. After all, while the markets are not completely efficient, they do possess within them valuable data via price and price movement (MACD and Relative Strength) that have been proven to a useful predictive value and, therefore, increase the odds (not to 100%) of forecasting future market action.

Posted by VinnyCatalano | Report as abusive

From a fundamentals perspective, you need to look not only at the 2012 and 2013 earnings, but also at the certainty with which they will be able to hit/exceed those earnings going forward.

Two reasons I am reluctant to invest in Apple:
(1) No dividend and (apparently?) no intention of ever issuing one. This is the corporate equivalent of a bubble, destined to inflate rapidly until it pops and entirely self-destructs.

(2) I have no clue how much they will be making in 2015. Over the past half-dozen years they have introduced the iPod, iTunes, iPhone, and iPad. As long as they continue to produce hit consumer devices, they will continue to be very profitable. But the life cycle of hit electronics is pretty short. Three years ago, Blackberry-maker RIM was trading at 100-150 and everybody wanted one. Now you can have them for $17. Is there any fundamental difference between RIM and Apple? Or is it simply execution?

Posted by TFF | Report as abusive

I think your points 2 and 4 point to the reason, which is simply that the stock market is a fiction composed of other fictions, and AAPL forces some of the fictions into conflict with each other. Specifically, the following fictions:

– prices represent, at some manageable level of distortion/indirection, what things are worth
– the stock market represents, at some manageable level of distortion/indirection, the economy
– the prices of individual stocks represent, at some manageable level of distortion/indirection, what those companies are “worth”
– you can use understandable metrics to relate stocks to each other and the market as a whole

But when we consider the market capitalizations of Apple and Exxon-Mobil, something has to give. It is simply insane to suggest that nice mobile phones are worth as much as oil.

WRT point 5: the opposite is actually the case. Apple is going to sell iPhones as fast as it can make them at the current margins for several years. See http://www.asymco.com/2011/11/28/how-man y-ios-devices-will-be-sold-in-2012/ for three independent estimation mechanisms which reach this conclusion. So the conflict between its results and the fictions of the stock market will only be heightened over the next couple years.

Posted by SamPenrose | Report as abusive

“And the high share price sends a message to bigger investors, too: it says that Apple isn’t in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks.”

Or even stock splits, which would not be dilutive.

Otoh, what’s the price of GOOG these days?

Posted by klhoughton | Report as abusive

Horace Dedieu at asymco has a post with the conclusion that the market values Apple’s innovation capabilities at $0. In my estimation, AAPL is massively undervalued: my target 5 year price is about $2000.

Posted by MaysonLancaster | Report as abusive

David Nelson pointed to this: “An increasingly larger audience will hold onto their new found toys for a considerably longer time. They will not feel the urge to upgrade as often.”
http://nelson.belpointe.com/files/Apple- Investors-Living-Denial.html

But what portion of its growth comes from upgrades, as opposed to new converts?

Posted by MickWeinstein | Report as abusive

Felix, I’m a regular reader and a big fan of your blog but could it be that your personal admiration for Apple products is keeping you from seeing the market trend where iPhone and iPad are concerned? While the wait for iPhone 4s was a part of it, the Q3 market share report still shows the overall trend towards Android: http://www.engadget.com/2011/11/15/gartn ers-q3-2011-smartphone-figures-samsung-o n-top-globally-a/.

The Android tablets have still not caught up but I would suggest that relative to competitors, the iPad will also have a rough road ahead soon.

Posted by bmozaffari | Report as abusive

Apple is not a technology company, it’s a lifestyle company. I know people who will buy the next iPhone with their rent money. You can note that it has plenty of room to grow as the economy grows (it will happen eventually), but it’s also risky money because it’s conceivable it can fall out of grace. We know what oil is worth; we aren’t sure about our lifestyles.

Posted by Curmudgeon | Report as abusive

I bought Apple a long time ago, and about 3 or 4 years ago, I started to think “I will sell them in the next 6 months or so”. And I keep thinking that. Then they announce a new product, or new features, and enter into new markets, and they keep growing. I know they can’t do this indefinitely, but their competition is so incredibly inept (mainly because they are technology companies, which means their market is constantly evolving, and they are managed by operations and financial managers, who are incapable of figuring where the future will be until Apple shows them) that I don’t know who will slow them down, given that the markets for their products is far from mature.

TFF, yes there is a huge fundamental difference between Apple and RIM, beyond execution. Apple designs to what people will want to buy, and RIM designs to want they want to sell. The latter is typical big company philosophy, and will lose to a competitor that focuses on what people want to buy every time. (Unless you have an exclusive license to a finite resource. Then you can sell crap or horrible service and still make money.) And another difference between Apple and most other companies is Felix’s reason #3 – they don’t manage their stock price. They don’t care about their stock price they care about selling stuff with huge margins, and they are very good at that.

If Apple started to pay dividends, their share price would rise. I’m not expecting they will do that unless the double tax on corporate profits is repealed, as they think they can make better use of the singly-taxed income than their shareholders can with doubly taxed dividends. I’m hoping they use some of that cash hoard to buy T-Mobile, now that (hopefully) the ATT attempt to acquire them is dead.

Posted by KenG_CA | Report as abusive

Most traders do not look at a screen with an Apple on the back. For them, Apple represents a strangeness they don’t get. Dell, they get, it puts bits of pre-made electronics together; Microsoft it gets – it owns 90% of the desktop Operating System and Office Productivity software markets by selling little round bits of plastic-encased aluminium at hundreds of times over cost price (food to any traders heart), with each product strengthening their hold over the other. Sony’s strangeness they put down to it being Japanese.

But Apple? It doesn’t believe in price cutting, market share or outsourcing; instead it builds ecosystems. Most of each trader’s PC using friends say Apple makes ‘toys’ when the reality is they make profits. Even one of the commenters above dismissed Apple out of hand as a company which makes “pretty phones”, which singularly misses the point.

Is there room for more growth? Yes, of course. Apple only has 5% market share worldwide in desktop computers, and although they own 70% of the tablet market it’s only about 18 million units big per year at the moment, so plenty of room for growth there too. Then there’s phones – Apple as a platform may not have the largest market share (they have a healthy 27%) but they do own over half of the sector’s profits.

Android is free. It makes no profits other than cuts costs for the highly competitive non-Apple smartphone sector (where Apple is market leader). Each company in that sector fights each other selling a pretty much identical product and has difficulty reaching double digit market share, or profitability. Google is probably the only beneficiary from Android. Android is the new Windows, and will create the same sort of system we have in the land of the PC now where the makers are lucky to get a 5% profit while the software writer makes a bundle more eg Microsoft makes 35% net profit (and this would be much higher if they didn’t have so many loss making products that are there for vanity reasons “we can make one of those too!”)

Apple is now a multi-sector company (computers, mp3, tablets, music sales, software sales and soon a reported move into TVs) and if it is being compared with other conglomerates it may explain lower valuations.

Posted by FifthDecade | Report as abusive

Felix,

I am long Apple, and am thus very interested in hearing the intelligent bear case. I think points 5 and 7 above are most salient. Additionally, I think mean-reversion of profit margins is the biggest risk; Apple enjoys far higher margins than its competitors. If these were to be competed to a more “normal” level, the equilibrium earnings capacity of the company would be lower. The key question is: is the innovation/design/insanely great capacity of the company sufficiently robust to keep one step ahead of its competitors?

I vote yes.

Posted by Sunset_Shazz | Report as abusive

@Sunset_Shazz I think you’ve got the picture lopsided – it isn’t Apple that needs to reduce it’s margins (it’s net profit percentage is still lower than Microsoft’s for instance) but it is more likely that the “normal” level is higher than that at which the flock of lookalike PC makers are forced to compete at due to a saturated and undifferentiated PC sector.

If one of the PC makers were to do something different, then it might be able to charge a price out of which research could come, thus driving more growth. The problem for them would be of course that Apple has First Mover Advantage on this model.

Posted by FifthDecade | Report as abusive

“Apple designs to what people will want to buy, and RIM designs to want they want to sell. The latter is typical big company philosophy, and will lose to a competitor that focuses on what people want to buy every time.”

Ken_G, I would lump that under “execution”. :)

Apple is absolutely a well-run company (at least thus far). Very hard to argue a bear case against quality management. I do hope that they recognize the point of declining returns (which inevitably they must hit eventually) and start returning cash to shareholders when that happens.

Posted by TFF | Report as abusive

What is even more shocking than the low P/E Apple is trading at is the fact that they are holding about a quarter of their market cap’s worth in cash.

I don’t think the company’s upside is anywhere near exhausted. The iPhone is the best brand in smart phones, but has only got a tiny fraction of the market. The iPad dominates the tablet market already, but it’s the hottest category now. And you have to wonder as the computer market share grows whether the network effects that gave Wintel its dominance might start reversing themselves. Of course, there’s other possibilities: the Jobs bio confirms that the Apple TV is in the pipeline with an interface that Jobs seems mighty proud of. And there are other possibilities: Apple could decide to give Netflix a run for its money; it could try an advertising model for content delivery (there are patents for advertising technology already filed by Apple). Apple’s strategic position is so strong that it would take some serious mismanagement to squander it, and the crew in power is definitely a gang that can shoot straight.

$700 per share would not be an outrageous target.

Posted by Wagster | Report as abusive

TFF, Apple has over $70 billion, and they keep it because they say it gives them lots of options. They have invested in their supply chain, which has definitely benefited them by lowering their costs and disrupting the supplies of their competitors, but that can consume only a fraction of their hoard. While I half-kid about them buying T-mobile, I don’t know what else could consume a big chunk of their money, so I’m really hoping they start to distribute some of it.

Posted by KenG_CA | Report as abusive

Something similar has happened to Amgen. Around 2001 its PE ratio was very high, in the 40s if I recall correctly. Since then the stock price has gone nowhere while earnings have increased steadily. The reason of course is that in spite of increased earnings its PE ratio has steadily declined until today it is less than 14.

Posted by Chris08 | Report as abusive

Maybe on “frothiest”; but I’d rather drive less, eat less, sleep less, etc. than go without my iPod and my music. I’m buying because I think their products constitute a monopolistic consumer staple increasingly affordable to an ever expanding global middle-income and above.

Posted by Progdef | Report as abusive

P/E often goes down when large companies grow. If you look at the past few years, Apple has doubled its revenues while more than tripling its net income. Like other large, high-growth companies before it, AAPL is seeing some years in which high profitability accompanies high revenue growth through returns to scale.

The question is, will Apple’s revenues or margins come back down to earth at some point in the near future? Felix and much of the smart money says they will stay high. But the unpredictability of tech is an inherent danger. Will iPads be the next big thing or will they go the way of the “revolutionary” netbook? Will Apple maintain its lead in both tech and design or will it slip away? If companies like Cisco or Intel can dominate their niches for years but never quite feel secure, how sure should we be about Apple’s chances?

My two cents are that Apple will dominate the smartphone market but smartphones will constantly go down in price. So Apple may end up being in the same position as in the PC market, where it’s phones are $200+ while everyone else’s are

Posted by MKCurious | Report as abusive

AAPL’s valuation has moderated because investors have gotten wize to the law of large numbers.

MSFT has lost money for investors who have owned it since 2000 when it was the largest company in the world.

CSCO has lost money for investors who have owned it since 2001 when it was breifly the largest company in the world.

I think AAPL is a pretty good value at this level… but it’s simply too big to warrent a 25 P/E. Only high growth companies deserve high multiples and AAPL is too big to grow like it use too.

Posted by y2kurtus | Report as abusive

“… but it’s simply too big to warrent a 25 P/E. Only high growth companies deserve high multiples and AAPL is too big to grow like it use too.”

They’re still growing revenue faster than 40%, and earnings greater than 50%. Amazon isn’t even growing sales as fast, and their P/E is over 100.

The comparisons with MSFT and CSCO aren’t valid, either, as neither company was growing like Apple has been (and is now) when their stocks flatlined and tanked, respectively.

Apple’s P/E is under 14 as I write this, and they will likely grow sales and revenue 40% or more y/o/y in the current quarter. I know the growth will ultimately slow down, but that doesn’t stop other stocks from having ridiculous multiples. Even Berkshire Hathaway, which doesn’t grow anywhere near as fast as Apple, has a higher P/E.

Posted by KenG_CA | Report as abusive

KenG, I picked up a moderate position in AAPL today…

They have strong near-term prospects for growing revenues, and a P/E of 14 doesn’t require exceptional execution to justify. At this price, even mere mortals can make an investment in Apple profitable.

I still have no clue how much they will be making in five years, but there seems to be at least as much upside as downside.

Posted by TFF | Report as abusive

TFF, the only reason I haven’t increased my stake in Apple over the last 4 years is because I keep believing that conventional “investing” wisdom that you need to be diversified, and Apple is by far our largest position outside our home and CA bonds (it didn’t start out that way, though). Whenever my wife gives me grief about not buying this or that, I remind her she didn’t want us to double down on Apple when it hit its $80 low in March of 2009 (that would have made up for all of our other losses sustained from the bank crisis of 2008). I know they will at some point stop growing or at least slow down, but I don’t know when that will be. I look at the ipad and mac book air as examples of their pathetic competition, and think it can’t be soon.

There were all kinds of rumors floating around in the summer of 2009 about Apple introducing a tablet, as they had ordered boat loads of flash memory and 10″ LCD panels, and had no product that could use those kinds of materials in the reported quantities. It had to be a tablet, and yet, when it was announced in January of 2010, their competition seemed shocked. But not shocked enough to start development of their own tablets. No, those geniuses waited until the ipads started selling in April of 2010 and Apple’s manufacturers couldn’t build them fast enough to start development of their products, which finally hit the market this past summer, two years after it became clear what Apple was going to do. What were those execs with 7- and 8-digit incomes thinking? What took them so long, and when they finally got their product to market, what possessed them to price them higher than the iPad?

And look at the Macbook Air – it’s been out for 3 years or so, to wild customer enthusiasm, and only now are there windows equivalents coming out, and they’re not cheaper as windows machines usually are. What takes these other companies so long to get up to speed? When they finally come out with a competitive product, Apple is ready to deliver the next generation, or something totally new.

Sorry for the babbling, I just had to expand on my “Apple’s competition is incompetent” theme. I could write a bunch of things I don’t like about Apple, but given how it is our biggest position, I don’t really want to do that.

Posted by KenG_CA | Report as abusive

KenG, that isn’t merely “conventional” advice, it is a basic mathematical truth. No matter how positive the expected return, any investment which has even a small chance of going bust will EVENTUALLY wipe you out entirely.

Diversification across multiple companies and multiple sectors is the best answer to reducing this risk (if the securities were uncorrelated, the risk of a complete bust would fall exponentially with the number of companies held). I can’t imagine J&J declaring bankruptcy, or even losing half its value, but even if it did happen, I would lose no more than a year’s gain on the portfolio.

Like I told my brother when he doubled-down on HPQ (quite profitably), “You had better be right.” And I’m never always right.

Posted by TFF | Report as abusive

#s 5 & 7 seem the most important. To #5, AAPL is today replacing thses businesses of 2001: Motorola’s handset, MSFT’s OS, and Dell’s desktop/laptop, plus the significant new business of tablets, and throw in a good chunk in the value from record sales. MSFT generates roughly $12B of profit off its OS business. AAPL has the ability to take all of that. That is a 50% increase from current profit.

Plus, AAPL’s profit is from inherently easily scalable processes. The value in an iPhone is not in the lean manufacturing process (Dell) or its ubiquitous monopoly position (MSFT), but in its user-friendly operating system and sleek design. The OS and design of Apple’s products scales nearly infinitely – separate out the design & manufacturing sides of the business. Design has significant fixed costs but nearly no variable costs.

To #7, more and more of the world will be able to afford Apple’s products, and the price difference between other players is decreasing. AND, are you saying that the economy doesn’t suck today? Shouldn’t it get better from here???

Posted by winstongator | Report as abusive

TFF, I know you’re right, but I feel like Doctor Strangelove, having to hold my hand down to keep from buying more shares. What is more frustrating than missing out on Apple’s rise, though, is that the stocks I bought to diversify from Apple mostly went down while they rose.

I take it your brother bought his HPQ shares a while ago. They haven’t done well lately. Now there’s an Apple competitor that I can go off on.

Posted by KenG_CA | Report as abusive

Nah, he bought HPQ when it dipped to the low 20s a couple months ago. Nice gain from that to $28, though the risk profile made me cringe a little. Any fool could get $28 of value out of HP, but their management has been surprisingly bad at making even simple decisions.

Posted by TFF | Report as abusive

One that you missed IMO. Institutional buyers. The vast majority of AAPL is owned by large institutions holding 100′s millions to billions of USD of AAPL. Most of these institutions have policies in place that limit just how large a % they can hold in any one stock. A forced diversity. As AAPL keeps growing, it gets harder and harder to stay within those guidelines and these companies are actually forced into selling AAPL to maintain specified ratios of various stocks.

Posted by StevenN. | Report as abusive

The big thing to me is no dividend. Really, at the core, the only value of any asset is how much income it can create.

By not paying a dividend, and apparently having no indication that it will ever happen, it’s essentially a ponzie scheme where each investor is assuming another investor will eventually pay more for the same share of stock, even though there is no expectation of ever receiving any actual shareholder return.

A growth company can get away with not paying a dividend, but the end goal of every growth story is to at some point mature and return value to shareholders.

At $350B, Apple is not a growth story at all, and with no dividend, it’s not a value story either.

Posted by JeffAkston | Report as abusive

#7. “Apple’s more vulnerable to an economic downturn than most of its peers.”
is demonstrably wrong. When the economy crashed in 2008 Apple continued to grow, indeed its growth accelerated and it pulled away from its rivals who laid off people and engaged in knee-jerk cost cutting, while Apple actually increased investment.

The counterintuitive reason that Apple does well in the bad economy is that the economy isn’t equally bad for everyone. Apple buyers, with their higher incomes and education levels tend to be the least effected by the downturns. People barely scraping by, who were the ones buying the cheap, grey econo-box computers and disposable netbooks were the ones who lost their jobs. Also businesses postponing PC upgrade cycles are disproportionally hurting Apple’s competitors, leaving Apple, with it’s tiny business market share unscathed.

Also, time and again investors have assumed that the last Apple innovation will be their last — be that the iPod, the iPhone or now the iPad. Apple keeps thinking differently on that subject.

Sure nothing is guaranteed — certainly not Apple’s future success. But who is going to do better than Apple? Someone may, but it sure seems hard to see among Apple’s rival’s. Amazon, with its ridiculously high P/E? Apple’s retail operation, brick and mortar as well as virtual rivals Amazon’s in profitability — but what’s most of Amazon is just a small fraction of Apple. And Amazon’s profitability is not going to go up thanks to selling a ton of Kindle Fires at a loss. Who is going to best Apple?

Posted by TedT | Report as abusive

Right wrote, “This doesn’t seem all that surprising.” Maybe to you it’s not surprising, but it is to a lot of market watchers.

Right wrote, “Where is the long-term growth going to come from? Are they going to just continually innovate new platforms at ever-higher price points forever?” Sure, why not, who else has shown any capability to innovate at all? And, what are you talking about “ever-higher price points”?

Right wrote, “Or will their massive iPhone and iPad profits be hampered by disruptive competition from Android and Windows phones and Amazon-style tablets (not to mention market saturation)?” Anything’s possible, but only two Android mfrs are making healthy profits, Samsung and HTC, and both appear to be losing IP infringement and trade dress lawsuits. The other Android mfrs are losing money, Motorola, Sony Ericsson, and LG.

Right wrote, “Today is the best of all possible worlds for Apple and it makes no sense to price in an indefinite continuation of current conditions.” No, a year ago, people were saying the same thing, and 2 years ago, and 5 years ago.

Growth may eventually slow, but pricing it for something that may happen far in the future seems nonsensical.

Posted by ChKen | Report as abusive

@ JeffAkston: “Apple is not a growth story at all”

So 40% Y/Y growth is not a growth story. Please do point us to the real growth stories out there — they must have some amazing growth rates to qualify in your book.

Law of large numbers? Apple has a 5% share of the world PC market. It can triple its computer income by merely getting up to 15% — hardly unattainable. How about the TV market? Apple currently has 0% of that. Just entering it and getting a measly 5% would mean more huge growth. How about new markets that like the pre-iPad tablet market don’t currently exist?

Posted by TedT | Report as abusive

While the prospect of “valuing” his company by making its stock attractive was another one of Jobs’ ideas of foolishness — the central thing was to keep innovating — what the “market” is saying about Apple is that its business model is built by hippies. That it depends on crazy things, like creativity, and not simply on the dollars and cents of another business model, like, say, Microsoft’s or Google’s with Android. (Android is good for Google, not so good for the hardware makers.) This is hard-rock business supremacism. Forget the fact that Apple has grown so amazingly using just that business model.

Posted by Swift2010 | Report as abusive

TFF wrote, “Over the past half-dozen years they have introduced the iPod, iTunes, iPhone, and iPad. As long as they continue to produce hit consumer devices, they will continue to be very profitable. But the life cycle of hit electronics is pretty short. Three years ago, Blackberry-maker RIM was trading at 100-150 and everybody wanted one. Now you can have them for $17. Is there any fundamental difference between RIM and Apple? Or is it simply execution?”

One, the iPod was intro’d over 10 years ago. The iPhone almost 6 years later, and the iPad 3 years after that. Game-changing devices do not get introduced every year. The life cycle can be short or long depending upon the device. A fashion phone like the RAZR has a short life. BB rode the smartphone wave, but had no stickiness. Your example of iOS devices have stickiness because of iTunes and the app and media content moat. Is there a fundamental difference between RIM and Apple? If you can’t see it, you don’t really understand either company.

Posted by ChKen | Report as abusive

Quote ‘Right’: “Where is the long-term growth going to come from? Are they going to just continually innovate new platforms at ever-higher price points forever?”

This, I think, demonstrates a lot of the problem right here. There is an established narrative about Apple: they sell luxury goods at premium prices for fashion-conscious idiots. This narrative was established during the Scully/Spindler dark ages, and multiple generations of lazy, incompetent “industry journalists” (but I repeat myself) have been parroting it ever since, backed by an amen chorus of random goobers on blogs. Research is hard, so people (including not just retail investors but alleged professional fun managers) make decisions based on the things that “everybody knows.”

Of course, it’s complete nonsense: every major product line that Apple has introduced since the first iPod has been minimally cost-competitive with its nearest competitors, but in many cases has been the clear cost leader! (Often because Apple used part of their cash pile to lock up the supply chain– even Samsung, which owns its own fabs and factories, has not been able to significantly undercut the ipad on price.) But still the hordes of zombies intone: “Apple is expensive!”

Established narratives are hard to fight. Just ask Al Gore, inventor of the internet.

Posted by Doctor_Memory | Report as abusive

I’ll bite at an explanation — back when Apple had a much higher P/E — the beginning of the chart — a lot of investors thought Apple would become the Microsoft of smartphones via the iPhone. Once it became clear that Android was taking the lead in market share, these same people started viewing it as the future Windows.

Trouble is of course that the analogy doesn’t work, and was never going to work regardless of who ended up with the biggest slice of market share. What matters is the profit share, not market share (and keep in mind in its glory days Microsoft was winning on profit share).

Eventually investors will figure it out — due to Apple’s pile of cash becoming too big to ignore, most likely.

Posted by TedT | Report as abusive

Share holders are waking up to the fact that it makes no sense to value a company at $355 Billion when 65% of its profits comes only from the iPhone. And when it’s so obvious to anyone with a brain that $50 no-contract, unlocked Android phones are going to take over the whole Smartphone market, and Android tablets are already now about to overtake the iPad.

The Apple stock will crash down faster than it exploded up after the iPhone. You will be lucky if the Apple stock stays above iPod level, it’ll be at a valuation of around $100 Billion maybe.

Posted by Charbax | Report as abusive

Charbax: I look forward to seeing how Samsung and HTC make money on $50 unsubsidized phones. Care to put a timeline on your bold prediction?

Posted by Doctor_Memory | Report as abusive

Did you say that Apple is an internet company on TV? I thought it was a consumer products company.

Still I agree that by many measures the stock is undervalued even when compared to that sector.

Posted by Neubert | Report as abusive

Microsoft has many powerful friends on Wall Street.

Posted by zatoGibson | Report as abusive

This analysis has some errors. We posted what we spotted here:

http://statspotting.com/2011/12/felix-sa lmons-apple-stock-analysis-factually-wro ng/

Posted by Statspottingnp | Report as abusive

Just a few points to take note of, a well written article nonetheless:

1) You’re acting like a lower P/E is a bad thing – it’s not! Is this P/E current or future – or was it stated and I missed it in the article? Lower P/E’s are generally associated with a higher degree of risk, which is clearly not the case here. That’s when we look at the PEG – sitting now at .17. Well below the 1.00 benchmark for a fairly valued company. So, look beyond the P/E – the TTM for this multiple is really good! They’re just putting capital elsewhere. Low P/E means buy, Buy, BUY! Both the P/E and the PEG suggest AAPL is undervalued, which projects well for your portfolio! At the hint of a dividend, this price will soar.

2) The article says when the economy turns south – when? Many economists say we’re still in the fade of the double dip recession. And, guess what… AAPL is still making more money than they know what to do with!

3) AAPL will not run out of buyers – how many babies are born every second? They’re good. Innovative companies like AAPL will always win over the next generation of buyers. We can already see it – RIP RIM.

Posted by W_teal | Report as abusive

“At the hint of a dividend, this price will soar.”

I think that is really the key… Based on their 2011FY earnings, they could easily sustain a $20/share dividend (based on free cash flow in excess of capital expenditures). That would represent a dividend yield over 5% based on the current price, a yield over 4% on a share price of $500 (a rise of roughly 1/3 from the current price).

Unfortunately, it is hard to value $$$ sitting in corporate lock-boxes. Apple has not offered any hint of how it plans to use that money (investing in supply chain wouldn’t use more than a fraction of their ongoing earnings). If you assume the cash hoard will be wasted, and that future cash flow will be wasted along with it, then you can’t assign much of a value to the company.

Posted by TFF | Report as abusive

Well put fifthdecade, exactly what I believe is the real reason for AAPL low P/E — the big fund managers really don’t understand Apple, they still remember the insanely overpriced Mac of the 80′s losing out to MS and think that Apple will be wiped out by the new MS’s : Google Android and Amazon Fires. What’s wrong with actually trading on fundamental facts instead of complete guesswork of we’re Apple will be years from now. After all if Apple ‘s fundamentals based on hard facts start slipping it only takes a few seconds to make a trade, but the fundamentals so far show plenty of continuing growth.

Posted by Aaplpi | Report as abusive
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