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Month September 2010

Entries 5 Total

Apple’s growth vs. top ten largest tech companies

Sep 27, ’10 6:44 AM

In the last article I described growth vs. P/E and price change for the largest “ultra-large cap” companies, of which Apple features prominent.

In this article I take the same analysis to the top ten largest technology companies (by market cap, see table at bottom).

In this comparison, Apple no longer has the largest P/E ratio. Qualcomm, Google and Oracle are all at similar levels of valuation relative to earnings, however Apple’s growth outstrips them, only with Google in the same quadrant.

Note the “Wintel” cohort consisting of Intel, Microsoft, HP clustered around the Low growth, low valuation quadrant in the lower left (coincidentally co-located with IBM). Oracle, Qualcomm and Siemens show high valuation with low long-term EPS growth. Cisco is somewhat on the fence.

When comparing how the market has rewarded growth through share price appreciation, the correlation to growth is much better. Google seems under-rewarded.

Data follows:

Comments (12)

Apple’s growth vs. top 10 largest market caps

Sep 26, ’10 8:57 AM

Apple’s stock price has been rising. Although it’s still priced at a P/E of 22 while facing near term EPS growth well above 50%, this is belated recognition of the potential of the iPad and the iPhone.

However, as it has grown, Apple’s valuation is now not only higher than any other technology company but it’s nearly the most valuable company on the planet. There is a theory that ultra-large market caps are reserved for companies that are past their prime. Sometimes this is attributed to the law of large numbers: that conclusion that big numbers cannot grow much bigger because compounding growth is exponential whereas markets are limited and become quickly saturated.

The trouble with this theory is that “large” is relative; large is often simply “the largest”. Large market caps are not what they used to be. During past booms, large caps touched a trillion dollars. Today, the largest market cap is merely $314 billion.

So I don’t put much faith in large number “laws”. The real question of under/over-valuation rests on whether the company is growing or not. Valuation is simply the net present value of future free cash flows (plus assets). So the most important determinant of current value is growth in cash flows.

It’s fairly easy to assess this: compare P/E which is a proxy for valuation with EPS growth. The following chart does this for the top ten largest market caps traded on US exchanges (as listed by finance.google.com).

One should see some correlation between the two variables, but given the 5 year time frame, many of these companies showed large volatility. There are outliers like HSBC which has a rapidly rising value even though it was badly affected by the credit crunch.

The other outlier is Apple. The company showed 93 percent EPS growth over a five year period and has a P/E of 22. The company with the next highest total value (Exxon Mobil) had 0.5% growth with a P/E of 12. The company with the next lowest total value (Microsoft) had 13.3 percent growth with a P/E of 12.

For an ultra-large cap, Apple’s growth is unprecedented and extraordinary. It’s in fact off the scale. The average growth of the other 9 top caps is 3.6 percent!

Apple’s growth is a factor of 25x higher. The P/E is only 1.6x higher.

The result has been a much higher appreciation in the stock price as shown in the following chart.

So it’s clear that Apple, in this peer group, is far from ordinary.

Data follows:

Comments (39)

Ten Years

Sep 25, ’10 2:09 PM

TenYears.jpg. credit: http://www.flickr.com/photos/x1brett/

The one on the right also includes a battery and cellular radios. Some still argue that the PC will never be replaced.

Comments (62)

Will Nokia build Windows phones?

Sep 24, ’10 1:44 PM

Will Nokia build Windows phones? | VentureBeat.

The chances are extremely small. There are three scenarios where this would make sense:

  1. If there was a specific market that required it. It would also need to be a large opportunity since developing a new platform and diluting existing platforms need significant upside. The only such market is the US, but there are better options available, namely Android that have better potential and Android is treated as a toxin by Nokia (see metaphor).
  2. Specific users. Windows Mobile used to be justified for business users, but Windows Phone is not targeting business users.
  3. The last option would be “strategic” i.e. Microsoft paying Nokia for using the OS (directly or indirectly through marketing co-spend or other symbolisms). I don’t think Nokia is desperate enough yet.

Although it’s never prudent to say never, I just don’t see any logic for Nokia to add to its bill of materials for phones while facing price pressure.

Comments (11)

Hewlett-Packard is bundling a tablet with a $399 printer

Sep 24, ’10 12:51 PM

The bottom line: HP’s decision to bundle a tablet computer with its new $399 printer could make trouble for competitors.

HP’s New Tablet Could Be an iPad Spoiler – BusinessWeek

HP took the control panel display from a printer and made it detachable. The idea, according to the manager in charge, is that this will encourage printing. Printing is a good business for HP because they manage to charge $7500 per gallon of ink.

I suppose there can be some sense to this idea but I don’t use inkjet printers so I can’t judge how popular this can be. But the headline suggestion that the new display panel cum web pad is “an iPad Spoiler” calls into question the author’s motivations. Maybe he did it for a bet.

But the real gem is a quote from Richard Shim an IDC PC analyst who says “Everyone is trying to figure out the opportunity for these types of devices, how to position media tablets in a way that they don’t cannibalize other businesses.”

That’s an interesting comment coming from a PC analyst. It says that the vendors in the industry are already feeling that the iPad is substituting regular PCs (and hence the need for a response that is sustaining not disruptive).

This acknowledgment means it’s only a matter of time before the idea of iPad as PC morphs from crazy talk to conventional wisdom.

Comments (17)