Apple trading even with the S&P 500

From the Apple 10K:

The following graph shows a five−year comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Composite Index, the S&P Computer Hardware Index, and the Dow Jones U.S. Technology Index. The graph assumes $100 was invested in each of the [securities].

In other words, if you had invested $100 in the S&P 500 in September 2005, you would have $103 now. If you invested $100 in Apple in September 2005, you would have $529 now.

Apple investors should rejoice!

However, in terms of reward for earnings, consider the following graph:

The red line represents the S&P 500 P/E ratio and the green and orange lines represent Apple’s P/E ratios depending on whether you include cash in the price.

The reward to investors Apple does not seem so appealing anymore.

Although Apple received a premium valuation to the S&P prior to October 2008, it has traded at a discount or in-line with the S&P since then.

Another way of putting it is that the P/E ratio for large companies has returned to pre-recession levels. The P/E ratio for Apple has not.

For a final point, a comparison of earnings growth (which should correlate to the P/Es) above shows that while the S&P is given a similar valuation to Apple, growth has been decidedly less spectacular.

Apple’s average growth over the period shown was 63% (shown as the orange line) while the S&P has grown at an average of -33%. Nevertheless the market has chosen to reward the two assets with the same multiples valuing their future growth in earnings roughly the same.

At least they are equivalent. For much of 2009 and early 2010, Apple was considered to have a far less promising future than the average large American company.

  • JonathanU

    Great post as ever.

    This really does show that Apple is a no-brainer investment. So long as you believe Apple will keep growing EPS, so to will the company's stock price. The fact that the market is valuing AAPL in line with the S&P actually gives me reassurance. It means the stock won't have much room for P/E compression ala AMZN et al. and that any future growth in EPS will flow directly through to stock price increases.

    • MattF

      My guess, in two words, is "Steve Jobs." One can make a plausible argument that Apple has shown that it can function without Jobs– but one can also plausibly argue the opposite– and that kind of uncertainty is poison on Wall Street.

  • Jon T

    A gazillion dollar question for investors like me is… why?

    • asymco

      Markets are not that efficient, let's leave it at that.

  • Laughing_Boy48

    I figure it's assumed that Wall Street doesn't believe that Apple can continue its growth for some reason. I'm not sure why. Apple doesn't have that much market share of desktops or smartphones, so it should easily be able to grow in size. At least that's how it appears to me. The whole company seems to be set up for future growth with high demand for products and its retail presence, so why does Wall Street figure it can't continue to grow. I do not see any lagging product demand in the lineup except for classic iPods.

    Does anyone know why Google shares are worth $600 and supposedly Apple shares aren't worth $300? What are they basing that on? Hardly anyone asks when Google shares are going to split and almost every day someone is asking for Apple shares to split.

    Amazon seems to be getting a free pass with such a high P/E. That damn stock leaps up without question. Surely it's not Kindle sales since nobody seems to know how many Kindles are even being sold.

    • Marcos El Malo

      The market cap between Apple and Google is different. The shares outstanding is different (I think Google has about 1/3 the shares that Apple does.

      Part of the reason the market is discounting Apple is because at some point, Apple's growth will slow and plateau. At some point, it will, or Apple's market cap will be theoretically and absurdly greater than total earth value. There's a point between now and and infinite growth where it HAS to stop.

      People long on Apple are betting that we're nowhere near the point where Apple can't grow further. They point to the nascent smart phone market and Apple's wide open opportunities there. They're looking at the iPad, and guessing that could be another huge market for Apple. And they're looking at past performance and near term future guidance. Well, at least some people are. 🙂 Obviously the market as a whole is taking a wait and see attitude, even at the risk of being left behind.

  • The only cap on Apple growing its earnings will into the future is Steve Jobs.
    Apple has not shown an ability to innovate new markets w/o Steve Jobs.