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Apple now trading at 10.5 times Deagol's fwd EPS estimate ex cash

Apple now trading at 12.9 times Deagol’s fwd EPS estimate (10.5x after excluding cash).

Deagol’s AAPL Model: Fiscal 1Q 2011 Final Estimates.

The revenue growth rate is expected to continue at 66% (following 61% and 67% for previous two quarters). Earnings growth is also expected to be maintained at 70% as it has been over the full calendar year.

Apple continues to be one of the cheapest stocks in the S&P 500 when measured by growth multiples.

After years spent thinking about it, I can only conclude that the company’s depressed valuation is due to the uncertainty surrounding the CEO succession plans.

  • anon

    Actually I think it is because Apple is a manufacturing company – too many things can go wrong in any given year.

  • ChampagneBob

    I think it's because of the large cash position translates into caution:
    a). Apple is concerned about the near future economic outlook
    b). Apple feels attractive acquisitions are over priced
    c). Apple sees no attractive situations that are growing as fast as the company is growing organically now

    If Apple started even a modest share buy back it would ignite a 50% gain IMO. Dividends are not necessary for stock movement. If Apple would invest in itself the stock would get the message clearly.

  • Tommo_UK

    Horace,

    I'm dumbstruck by your little missive (for lack of a better description) above. I thought you were an incisive analyst, not an armchair prognosticator. I'm not going to do or say anything specifically in response to what you wrote because I don't want to perpetuate this macabre topic any longer, but colour me disappointed that on Christmas Day the most interesting thing you could think of to write about Apple ended up being a Rob Enderle style throwaway comment about Steve Jobs and his health.

    Merry Christmas to you too. I"m sure AAPL investors everywhere will feel cheery and filled with a warm glow at your observations and are looking forward to the remaining trading days of the year.

    Cheers, thanks a lot

    Tommo_UK

    • asymco

      It's not a throwaway comment. I have thought about it a long time. Deagol's forecast was just published. I am as optimistic about the company's future as he is. My point is that there are no valid fundamental reasons for the low price. My objective was to draw attention to Deagol's post, not to SJ's health. I edited the title to reflect this.

      • Tommo_UK

        You said " I can only conclude that the company’s depressed valuation is due to the uncertainty surrounding the CEO succession plans."

        "ONLY conclude" – for emphasis.

        There are so many contributing factors to AAPL's underperformance and under-valuation that the matter of a succession plan is merely one of several which might be weighing on the stock price.

        You don't suggest this. Instead you state quite firmly that "having spent years thinking about it, I can only conclude.." etc. This by definition excludes any other factor, in your mind, as being particularly influential on the stock's performance other than the succession issue. I respectfully completely disagree with you.

        I have followed AAPL since 2001, and heavily since 2004. I too have noticed the succession plan matter being mentioned and discussed both publicly and privately and the matter of SJ's health impacting the stock, and lived through the roller-coaster performance of AAPL as first the Stock Options Backdating debacle hit the stock, quickly followed by the "SJ is in the realm of the living dead" era, and then the '08 worldwide economic melt-down. I think everyone on the planet, let alone informed AAPL investors, is aware of the impact SJ's health *had* on the stock. It doesn't really take years of thought to come to the conclusion you arrive at though, and to give it any particular weight – especially when there are a myriad of other matters (not problems per se, just matters) weighing far more heavily in my opinion – seems extremely odd to me. Your work is invariably interesting, engaging and thought provoking. Sometimes even eye-popping! But this wasn't.

        I'd be far more interested to hear your thoughts and some incisive analysis showing how a 10:1 split and the issuance of a tiny dividend might impact the stock, especially following the likely outcome of the Nasdaq being forced to rebalance the index thereby diluting AAPL's influence on it and thus the market, and making it less prone to being used for manipulative purposes. You might even think this would be a bad thing, or be able to show it would negatively impact the stock. Either way, seeing as it is so widely discussed a topic, it would make far more topical and interesting, not to mention informative reading, than your observation above.

        In addition, what boost might the stock being bought by dividend-yielding mutual funds have? Do you not agree that post-split, AAPL could jump from $30-ish to $40 in a flash, whereas $300 to $400 seems like an incredible challenge? Mightn't it be simple psychology preventing the world's second largest megacap (excluding odd Chinese companies) from rising to its true value, rather than anything so esoteric as concerns over a succession plan?

        Having spent years following AAPL myself, I can only conclude that Apple's Board of Directors simply don't give a monkey's arse about their stock holders, or by now they'd have split the stock and issued a tiny dividend. The SJ health issue, or any succession plan (or lack of) is not a factor IMO. Thank you for your incredible devotion to analysing AAPL and publishing your work of which I am a long-standing admirer, but I simply cannot agree with your conclusion that it is the market's lack of awareness of Apple's succession plans which is holding the stock back. More likely it is just the large sticker price, a lack of understanding of its business model and future growth prospects, and simple fear of buying at the top of the market (as perceived by the pros, who all seem to want to sell into January), when AAPL itself represents a large proportion of that very market due it its weighting.

        Looking forward to your next article :)

        T

      • asymco

        I followed the stock about as long as you have. The point I'm making is that there is no other explanation that I can come to. I don't believe dividends, buybacks, splits would affect the P/E.

        The only other explanation I've heard was that the growth is not sustainable, but that's been put forward for a long time, and growth does not seem to be letting up (and is fairly easy to forecast.)

        I'll be posting an update to the following chart: http://www.asymco.com/2010/08/01/apples-valuation

        You can also see more about valuation here: http://www.asymco.com/2010/10/29/apple-trading-ev

      • Ted Cranmore

        I have to agree with Tommo. A 10:1 split, plus a dividend moves the stock quickly to 40. This is purely psychological but has been a tried and true technique for years. Some money wants to feel there is more upside, somehow peolple can't believe Apple can go from 300 to 500 as it's too big a leap. Ask those same people about a move from 30 to 50 and they will say it's very possible and will allocate more investment to AAPL since they see more potential upside. I'm not saying it makes sense, I'm merely saying that it is so.

        Another item capping the impression of capped upside in the huge market cap, many seem to feel this limits the upside quite harshly as well. They feel being this large simply means they cannot value AAPL vs growth rates like you do any other company.

        Now really is the time to add a dividend for the reasons stated by Tommo. There is a lot of institutional money that requires a stock to pay dividend before they can invest. Adding a dividend creates more demand for the stock by opening up AAPL to another class of buyer. I'll add another small influence to the dividend oriented retail investor but clearly the institutional fund manager is the key here. Further, "yield support" means investors get more reasons to buy when the market and stock are going (or feared going) lower. This gives comfort to a whole lot of buyers who would be interested in buying apple but have weak stomachs and feel that it's been flying so high and know how it can be severely punished in a general pullback.

        (Note that Apple could throw a few billion per quarter at the dividend AND STILL be increasing their already immense cash horde significantly!)

        I will agree with many others that the company has been misunderstood, especially by wall street who was blackberry-centric and viewed iPhones as 'toys'. This is now slowly changing with the iPad and the iPhone making significant inroads in the corporate market. When everyone speaks about (and actually understands ) the 'apple ecosystem' and the 'halo effect', it will be a good day.

        With one more nod to the perception around "the law of large numbers" also capping future moves, I will be bold enough that to predict that IF there is a more optimistic feeling in the market in 2011, and Apple has the holiday quarter that I and many others predict, we will see an slight increase in apple's PE in 2011. If we couple that with a stock split and dividend, we will see a notable increase in the PE. But, for all the reasons noted above, you need to simply accept that AAPL will never see the PEG ratio that we expect fro other stocks and buy it purely on earnings growth. So far, it's been one helluva ride.

      • chano

        There are reasons other than Jobs' supposed fragility. Horace. It will take a few more years for the market to trust Apple in the way it clings to trusting MS, DEll and allits old faves. And it will take them longer to understand that the benchmarks they're used to using just don't apply to AAPL. A company can become huge and remain entrepreneurial in its hunger for success and its energy in chasing those appetites. The laws of large corporate numbers don't apply here …. yet.

      • chano

        I can summarise what I said earlier. The market just doesn't understand the Apple phenomenon. The huge company with minority market shares mostly. The market does not trust what defies its expectations and understanding. This puts Apple outside the market's comfort zones. The result: under-valuation based on incomprehension and resulting scepticism.
        A split would go a long way towards easing these anxieties, even if it really changes nothing. We are simple creatures in the end: greed and fear drive us.

    • MattF

      On the contrary, I think that when someone who is an expert financial analyst says that financial factors don't seem to be determining the market value of some stock, that's an important piece of information.

    • santa

      Regarding this thread, we are here in the spirit of open discourse – people are free to make observations, propose theories, brainstorm, whatever. To try to douse that with personal criticism or squelch any one idea with sarcasm is simply not cool, no matter what your reasons.

      • Tommo_UK

        "we are here in the spirit of open discourse – people are free to make observations, propose theories, brainstorm, whatever. To try to douse that with personal criticism or squelch any one idea with sarcasm is simply not cool,"

        I was under the impression we are having a very open discourse and exchange of ideas and theories – isn't that what we're debating: what is actually influencing the stock and suppressing it? I'm not sure where you get the impression there is any personal attack going on.

  • Jesse Clark

    I think it’s none of the above. I am not fluent in such things, but my guess is that Apple’s stock price reflects the simple fact that no one in finance understands why Apple is successful. They don’t trust it, therefore. It’s easy to see that none of Apple’s competitors understand either–their efforts at putting out competitive products show this plainly.

    Here’s one easy example: why is no one competing with Apple on customer service? The satisfaction polls come out year after year, with Apple at the top, but do we hear anyone boasting “we’re going to kick Apple’s butt in customer service”? No, we hear about how such-and-such is coming out with a better camera or more RAM, etc. Why does no competitor see this?

    Answer: it just doesn’t make sense to them that it’s a cost that materially contributes to Apple’s success. If an investor or competitor can’t understand that simple thing, they’re not in a position to properly value the company’s assets.

    • ericgen

      I think Jesse's assessment is the best that I've heard in awhile. It also fits with my own opinion. I was at the Genius Bar the other day getting a Mac repaired and commented on how humorous it is that the competition can't figure out what Apple's secret is: Make good products, stand behind them, and treat your customers well. The competition are all still looking for the trick or the angle.

      It's long been lamented that corporations don't plan for the future, only for the next quarter's results. I doubt that Apple's completely oblivious to a quarter's results, but at best, it's something noticed in their peripheral vision and nothing that ever enters their focus.

      As such, just as Apple's actions make no sense to their competitors, it also makes little sense to their investors because no one else does it. That's also why everyone keeps waiting for the 'law of large numbers' to catch up with them. It makes no sense that a company can grow this large, this fast, and still keep growing quickly.

      They may be hanging onto Steve Jobs' health as an issue, but it's likely just an excuse that they understand and that keeps them from having to dig deeper and actually understand what Apple's actually doing. If they accept Apple's model it might put them into the uncomfortable position of having to acknowledge how bad most other corporations' models are. This is particularly discomforting as they likely have large investments in many of those companies.

    • Chris Jones

      I agree with both Jesse and Horace, but my take may be slightly different in that I don't think it's an either/or model. In other words, I don't think a single derivative is sufficient but the price is a function of multiple partial derivatives.

      Horace is correct and the market knows that Jobs' life expectancy is less than other men his age who don't have his history of bad health. And on this issue, I think the Apple enthusiasts (like myself) are correct in arguing that Jobs has built a company from his vision and it will thrive for years after he's gone. But on the other hand, there's no genius like Jobs so it won't be good for the company to lose him.

      And I agree with Jesse that it's difficult if not impossible for some people to understand Apple. I'm surprised by how many people, to this day, still maintain that Apple's only distinguishing advantage is their marketing. But seemingly intelligent people genuinely believe this, so that makes me fully agree with Jesse.

    • FalKirk

      I am leaning toward the "People don't understand Apple, therefore people don't trust Apple to continue their current success" theory too. In fact, I don't think it's hard to support this theory at all. Listen to some of the statements of Analysts and it's clear that they don't understand Apple's business model. Look at the actions of Apple's competitors and, by not emulating Apple, it's clear that they don't think Apple's approach is the correct one. It seems clear to me that no one believes in the Apple business model except Apple. Unfortunately for Apple, its stock market price is heavily influenced by public perception. Fortunately for Apple, profits are not. Perhaps one day the former will catch up with the latter and Apple's stock market price will, at last, accurately mirror Apple's business success.

  • kevin

    I also think it's multiple factors but generally they have to do with people still not understanding what makes Apple successful. As Chris notes, many think Apple succeeds only because of marketing. Many people also think the iPhone and iPad will go the way of the Mac and not the iPod, due to superficial analysis. They just can't see how Apple can defend against competitors because they really don't know why people buy Apple products (other than marketing). Those people also don't think that Apple can come up with another hit product, especially because they can't see the ecosystem behind it, or the Apple culture behind it (other than marketing).

  • Ziad Fazel

    Compare Apple with Berkshire Hathaway and their CEO succession.

    Apple's PE is 12.9 with growth > 65%
    Berkshire's PE is 22 with negative earnings growth.

    Berkshire seems to be assessed more on its Price/Book, or more sophisticated valuations of its enterprise value. Perhaps investors are concerned about Apple's ability to keep winning with its major product introductions: would iPad be another Newton, or would iPhone be another Motorola ROKR.

    Steve Jobs is 55; Warren Buffett is 80.

    Neither are lying in hospital beds. They are flying around the world to look at investments and products, and take vacations with their families.

    While Apple now has several business units providing sizable chunks of earnings, many are consumer products purchased from discretionary earnings, or business products with a (deserved) premium, in markets flooded with commoditized competitors. Apple's customers could probably defer purchasing their products, although in this deep recession still have not.

    Berkshire Hathaway's products are much more diversified, and are in businesses where purchases are difficult to defer. Insurance? Razor blades? However their earnings are suffering from their exposure to basic products used in construction, and other recession-affected businesses.

    Apple puts considerable energy into its quarterly earnings, often making remarks about competitors, and never missing an opportunity to claim a record $ or volume in its business units, or some sales milestone like a million or a billion.

    Buffett doesn't care about volatile or negative earnings as long as his look-through long-term view is good, and does the bare minimum with analysts.

    Both companies are sitting on piles of cash so large that investors are clamouring for it to be invested or paid out.

    Both men are the largest shareholders in their companies, and take only token salary.

    Perhaps investors are worried about Apple's ability to keep developing hugely profitable products after Jobs retires or dies. But Berkshire Hathaway's PE is much higher, their CEO is 80, and the company is already experiencing negative growth. Investors are growing frustrated with Buffett's reluctance to invest more of the cash his company is generating, especially when his genius is supposed to be in where to invest.

    There may even be a premium in Berkshire's price because of the expectation that Buffet's successor will be more aggressive, perhaps from one of his insurance subsidiaries that takes bigger investing risks. But with Apple, the current management doesn't seem to have a successor who could provide overall guiding vision. Who would rise above their peers to lead overall when each has become viewed as excellent specialists?

  • http://twitter.com/BrianSHall @BrianSHall

    Interesting. The other day I posted a chart on my site with no analysis, rather simply showing the price gain of $AAPL in 2010 compared to all the other companies with competing smartphone platforms (e.g. Microsoft, Nokia, Google, RIM). Apple has gone up appreciably this year while none of the others have gained at all.

    • http://twitter.com/BrianSHall @BrianSHall

      Oy. Rest of comment cut off.
      I agree in part with Jesse above, it's a misunderstanding of Apple. Are they hardware? Retail? Gaming? Entertainment? A phone company? After all, ten years in and there's still no competition to iPod and iTunes of any relevance. Plus, I'm convinced many think that Apple will lose this platform war with Android the way they did with Windows. Wrong. It's a whole new (and much bigger) world.

  • Mark Hernandez

    How come other company's stock is not depressed because their CEO might die in a private plane crash?

    Shouldn't investors do due diligence and determine the actual role Steve actually plays at Apple? His interview with Mossberg and Swisher at D3 this past year gives some fuzzy clues as to how the company works internally. It's not the case that all that Apple does is only due to Steve Jobs himself. Their culture and M.O. has to be seriously engrained after all these decades.

    I think the real problem is that investors do not understand the industry. Brian Hall points out how "winning the platform wars" is an oversimplified view of the industry and the first red flag that the person who mentions winning and losing doesn't know how the industry works. There's no winning or losing, there's only splintering and leapfrogging and slowing to a crawl, but there's room for many players.

    For the trillionth time, the problem is information management. When it's too hard for people to understand things, it's because information is poorly managed, obfuscated, sensationalized, and overshadowed.

    asymco.com is one of the few oases of clear, calm and logical analysis around.

  • Iphoned

    I think the low valuation has more to do with perceived uncertainty of iPhone high margins. Clearly the WS judges those to be peak margins. WS could be wrong here. Or not.

  • O.C.

    Competitors don't get it, financial analysts don't get it, investors don't get it, a lot of people who buy it don't get it, I don't get it, hell..S.J. doesn't get it.

    They design beautiful stuff, but kind of expensive. You pay a premium to own an Apple. To keep their profits margins that high, they have too. But whenever you hear people – who really love Apple – talk about Apple, its as thou Apple is not a company in it to make money. They don't charge you all that money to make a profit. Making a profit is not what drives Apple. Customer satisfaction and pleasing their beloved fans is what drives Apple. Whatever Apple runs off the assembly line, they – people who really love apple – scoop it up. Need it or not, its an Apple so they have to it. When you have a brand that's selling so much – to so many – and a lot of them can't give you a reason why they bought it other than its an Apple, it makes people think: I Don't Get It.

    The most dangerous shark it the one you can't see. On Apple they can't see what's keeping them on the track to such success. So its hard to see when or whats gonna get them off.

    • LB51

      Our household are recent Apple product buyers. Well, at least since 2008. We bought an iMac. All I can say is we did pay at least $500 to $700 extra, but here's what we received in return: incredible LED back lit glass display that is just unbelievable, a solid piece of equipment, a computer that just works and does not stop; we have not had to reboot since we first turned on the iMac.

      If reliability and pleasure to own and operate is costing me a premium, I'll gladly state that I am really saving a lot of excess time and wasteful energy not having to Jerry-rig my computer.

    • FalKirk

      This is a load of nonsense. People who buy Apple products know exactly why they are buying them – they get good value. Year after year, decade after decade, Apple continues to sell products that provide a superior user experience and exceed expectations.

      Apple has the highest satisfaction ratings, the highest loyalty ratings the highest quality ratings and they often exceed their competitors by ten or more percentage points in these three categories. Say what you will about Apple, but don't for one second tell me that Apple customers can't give you a reason why they bought their product from Apple. They bought it because they got more than their money's worth. It's that simple.

      • O.C.

        This is the view a lot of people have of Apple users:
        http://www.youtube.com/watch?v=FL7yD-0pqZg

        They don't get it and as such its hard to figure out what their next move will be.

        As for Apple users not knowing why they bought an Apple product. I never claimed none of them know. i just said a lot of them, especially the new users buy it because of the brand.

      • FalKirk

        Underestimating the intelligence or the motivation of an Apple customer is an indictment of the observer, not the Apple customer. Microsoft, for example, has based many of their advertising campaigns on the premise that their products are just fine but their users or Apple users are at fault for not getting "it". I would respectfully suggest that Microsoft has cause and effect reversed; that customers get "it" just fine, but Microsoft doesn't.

        Go back and review the spoof that you cited. Every feature that was cited as proof of the superiority of the Evo over the sold out iPhone added a layer of complexity to the customer's life. There is great psychological value in intangibles like simplicity, convenience, intuitiveness and certainty. People who focus on features instead of benefits lose sight of this. Most human beings simply do not care what a phone does – they care what a phone does for them.

        O.C., you sound like an intelligent person, but when you state that a lot of new users buy an iPhone because of the brand, you lose all credibility. Yes, people do buy products because of the brand. A brand is a shortcut that helps people to quickly reach decisions on what would otherwise be a complex and time consuming process. The question you should be asking yourself is WHY the Apple brand has become so trusted. If you focus on that question, you will see that Apple customers are not acting irrationally at all. They are putting their trust in a brand because the brand has earned the trust of millions of Apple customers over an extended period of time.

        Now, if you're arguing that Apple's stock is undervalued because observer's (like you) don't "get" Apple and don't "get" the Apple customer, then I'm right there with you. But if you're arguing, as you did in your original post, that it's the people who buy Apple products who don't get it, that Steve Jobs doesn't get it, that Apple customers are unfathomable and therefore Apple's future is unfathomable, then I am opposed to your position. Just because you don't understand something does not mean that it can not be understood. Understanding Apple's customer's is as easy as it gets. They trust in the Apple brand because the Apple brand has, over time, proved to be trustworthy. How hard is that?

      • O.C.

        To give you another example:

        "Apple simply does not care about their share price" "What they do care about are their employees, their customers, their suppliers and their products."

        And I've heard this so many times that it makes you wonder. Do people really belief this. And if they do, than yes, they are unfathomable. At the end of the day Apple is a company in it to make money. Customer satisfaction is nice, but only if it generates more money with customers bringing in others and staying themselves. If Apple could choose to have no profits and customer satisfaction or no customer satisfaction and profits, they would choose the latter. Money is what keeps a company going and not loyal fan base smiles and praise. And the day they start believing that, is the day people outside of their circle will start to understand them some more.

      • FalKirk

        "If Apple could choose to have no profits and customer satisfaction or no customer satisfaction and profits, they would choose the latter."

        Says who? Can you not see that Apple values both? Customer satisfaction and high profits are not mutually exclusive. They are, in fact, mutually dependent.

        Again, just because others do not understand what Apple is doing does not mean that Apple does not know what they're doing. It seems to me that, by any objective criteria, it's very clear that Apple knows exactly what they're doing.

      • ericgen

        How can you say "it's very clear that Apple knows exactly what they're doing"? Clearly, they're just very lucky! Over, and over, and over again… :)

      • O.C.

        Say who? Every sensible thinking company.

        They are not that dependent as you claim. Look at Microsoft. They make faulty software as people always like to point out so their customer satisfaction couldn't possibly be real high. But they're still racking in the billions every quarter.

        And that part about "If Apple could choose to have no profits and customer satisfaction or no customer satisfaction and profits, they would choose the latter" was an hypothetical one. But you can't possibly think that given a choice they'd choose the former?

      • kizedek

        MS is in a different business. They are licensing an OS to hardware manufacturers. Of course they are making a profit. How much money does it cost to generate serial numbers and allocate blocks of them to hardware manufacturers at 30 bucks a pop? Or, alternatively, how much does it cost MS to copy a DVD and slap it in a box and sell it for 300 bucks a pop?

        If they weren't racking in billions every quarter, there would be something wrong with them. It's a no-brainer (literally). Of course they would rack in even more billions if the Windows and Office monopolies weren't also propping up their other businesses like XBox and mobile devices.

        The computer hardware manufacturers, other than Apple, are of course NOT experiencing good profits. They are competing for a razor's edge of margin, or losing. They don't have good products that they stand by and their customer satisfaction is nowhere near Apple's. So, the theory holds true: profit and customer satisfaction are mutually dependent.

        Apple recognizes how to keep customers, and part of this is knowing what customers want — a complete experience and a quality product. Apple's OS and software is cheap by comparison to MS'. The OS is 129, or 79 or whatever. Not hundreds. Apple continues to make its 30 percent and doesn't try to milk a monopoly for several hundred percent. Apple aims for its OS, software and hardware to work together to provide a superior experience. It gets loyal customers in return.

        Of course Apple needs to sustain itself and grow and make money. But if they say they want to make insanely great products for their customers and this they have done for 3 decades, than we will take them at face value. Apple is working well at about 30 percent profits, and they do deliver new and better and quality products all the time. They keep working at it and always seek to improve over themselves. They aren't afraid to make their own products obsolete. That is why they have the fans they do.

        Basically, we believe Apple deserves its profits, and we believe that MS does not deserve its profits. Simple as that. Of course you may say we are just talking about two impersonal corporations and we are romanticizing Apple. But corporations are made up of the people in them. We trust Jobs and Co. We do not trust Balmer and Co. Very simple.

  • http://twitter.com/relentlessFocus @relentlessFocus

    I'm skeptical that it's doubts about SJ's health, I think it might have to do with a residual subconscious suspision about Apple as a grown up company. Not only is Apple's less than stellar PE an enigma but here's an extension of this quandry. I own Amazon stock which is selling at a PE of 75! Amazon has had a high valuation for quite awhile now. It makes no sense even though it is a great company. What could give it a PE of 75?

    And consider this. Both companies are led and driven by a visionary founding CEO with great status in the financial world and a fair share of public awareness. Either company would go through an enormous adjustment if their CEO was not able to continue. One's PE is 75, one's PE is 21.

    Another sign of the rational market place?

    • asymco

      From October 27th post: http://www.asymco.com/2010/10/27/wall-streets-inf

      "The only conclusion I can draw is that the market does not believe that Apple has significant growth opportunities. A P/E of 20 with consistent 70% growth is, to be blunt, damnation. For comparison, Amazon just reported 16% growth in earnings and was rewarded with a P/E of 68."

      How many quarters of 70% growth are necessary to move the P/E above low 20s (ex-cash about 17).

  • Yowsers

    Given the number of institutions in the market who have a piece of AAPL, and the various systems they employ for determining where and when to take a position (fundamentals based on sales, valuation, etc, or technicals, or momentum players, or combinations of those), I don't know that any one factor can describe a stock's valuation that you can lay at the feet of the majority of those players.

    Select events that briefly captures everyone's attention can move a stock (like when a company gets or loses a major contract, an exec is indicted, and so on.). Those are special events and you can safely assume everyone is scrambling in response to the same factor that impacts fundamentals.

    Fundamentals matter, but you really only see those factors emerge and pay off over long term time frames — like years. They can evaluate the business fairly well, but not so much in evaluating the short and intermediate term stock price. Anyway, I ditched fundamental-based investing years ago. It gave me no edge and I am poorly suited to it. These opinions are typical for a technical player.

    • Sam Penrose

      This is my favorite of the replies so far, but I'd go further: APPL brings two implicit models into conflict: the "fundamentals" model and the semi-conscious heuristic that stock market valuation roughly reflects a company's share of the "real" economy.

  • Bob Monsour

    I have to agree with Horace's "conclusion."

    Look at their increasing strength in retail. I have been listening to every conference call for the last several years and they continue to repeat the line that "nearly half of Mac buyers in the stores are new to the Mac." Earlier they said more than half and over the last year it has changed to "nearly half." Regardless, this is an incredible indication of market share growth in retail.

    Also, the recent news about the migrations and support within the corporate world. I don't recall the numbers, the the number of Fortune 500 companies piloting the iPhone and iPad are very very high (again from conference calls, and I'm sure available elsewhere on the net). People using Apple products at home want to use them at work. I'd suspect that more of the corporate IT guys are among them as time passes (as their kids all want Apple).

    Look at market share in the university segment. It's growing. And what kinds of computers are those kids going to continue to use at home (and want in the workplace).

    They have the highest gross margins in the PC business and in the phone business and they make more absolute dollars than any of the players in those markets. While they have lower share, they simply make more money due to their higher margins.

    It's clear from the conference calls that the analysts don't "get it." I don't know how many times leading up to the iPad that I heard them ask nonsense questions about the netbook segment and questioning why Apple would seem not to want to go after the low-end of the market. As someone noted earlier, it's clear (and Tim Cook repeats this often), they will only make products when they think that they can make something that provides an excellent customer experience.

    Apple also continually seeks to use sufficiently advanced technologies and manufacturing techniques, not based on the bleeding edge, but clearly working their best to push as far as they can and still make a massively manufacturable product in very large quantities.

    While all of us may not be able to see beyond the iPad for the next "new category" product that they might come up with, there's certainly a lot of headroom with the existing product set as evidenced by this past year's new MacBook line as well as only the initial launch of the iPad. And on top of that, as Steve Jobs has often said, they work very hard at saying "no" to a lot of ideas as evidenced by their recent decision to exit the XServe line of rack-mounted servers. They clearly offered no real advantage in that space and it simply didn't face the consumer.

    Having just rambled off all of this, I can come up with no clear reason for the stock to sit where it does, OTHER THAN the question of succession at the company.

    I'm holding the stock and would certainly like nothing more than to see what we all probably believe is what it "should be worth." Having said that, the older I get, I find it harder to deal with the lack of buybacks, splits, or dividends. I'm expecting we're going to see a very nice December quarter come late January. And gen2 iPad that will likely come in 2011 will be welcome. I plan to buy one as I held off on the 1st version.

    I look forward to continued reading the discussion on this exceedingly interesting topic.

  • Charel

    Apple simply does not care about their share price as much as other corporations. As long as it generally moves up to satisfy the employees' share options value.
    What they do care about are their employees, their customers, their suppliers and their products. There is no need to attract new capital as their cash hoard will see them through. To them, investors can buy, sell or hold on to the shares. If they concentrated on the share price at the exclusion of all else they would quickly become like Enron who cared for none of the above and we all know what happened to them.
    Analysts don't get it because if they did they would have nothing to speculate about and their house of cards would come crashing down leaving them out of a job.
    With increasing sales and profits the shares will go up from the low base, but at $2000 a share they would have a problem attracting the brightest to continue the magic that is Apple, with or without Steve Jobs.

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  • Macorange

    It's NOT the analysts fault. Many now have targets north of $400. Almost all have screaming buy recommendations.

    When in doubt, go back to the fundamentals that drive all markets: fear vs. greed. The single biggest factor in the stock's current discount is the recession mentality that still grips the markets. Rationally or not, there is a lot to be fearful of about Apple if you are in a fearful mood: There's a ton of competition in computer electronics. Winners become losers overnight (e.g. Sony). Apple itself has a been a big loser before and almost went bankrupt. Now there's a big target on Apple's head as everyone guns for it. Amazon isn't free of competition, but it's got this dominant position in a greatly expanding field that people are less fearful about.

    As hard as it is to imagine after 2 years of recession mentality, but at some point greed will return to domination. And when it does, AAPL's pe will again reflect it's growth rate. Until then, at least we can enjoy the rise that will occur from the 70% growing "e", with less opportunity for pe comoression due to how low it is already.

    • asymco

      The recession mentality has dissipated for most other stocks if we look at the S&P average P/E. S&P P/E has returned to pre-recession levels. Apple's P/E has not. It is in-line with the S&P now though has often dipped below that average. If you use P/E as a proxy for growth potential the market is at least as optimistic for the average large company as it is about Apple. This in spite of the fact that Apple grows its earnings and sales about an order of magnitude faster.I have been watching this disconnect between growth performance and pricing (for Apple and for the S&P) for a year. I write about it once every quarter. The last time was in October (http://www.asymco.com/?s=S%26P&submit=Go) There is no fundamental explanation that I can come up with and the longer it stays disconnected the more mysterious it gets.

  • heywally

    Possible APPL issues:

    – fear of waning consumer
    – fear they can't keep the growth rate up
    – competition from Android and others
    – everyone already owns it; it's a big boat to move
    – Steve Jobs health
    – it's done pretty well anyway, but stock too big for wild upside
    – it's digesting a pretty big move – for a big company – over the last years

    Still, overall market moves aside, it seems like a slam dunk to average 20% + per year for a while, doesn't it?

  • Angel Lamuno

    I do not offer insight into the minds of financial analysts. Horace has shown brilliantly that Apple's growth is sustainable … in the (relatively) short run: we can reasonably expect the iPad 3 and the iPhone 7 to be smashing successes but, who can tell what Apple's position will be in the long run, let's say in ten years? Presently nobody seems to be able to dominate mobile computing with its platform in the way that MS still dominates PC computing with Windows. Apple 'holds' a uniquely valuable asset who, like every human being, is a 'wasting asset'. Pancreatic cancer and a liver transplant expose Apple investors to a definite and most significant risk. There's also the secondary but significant question of the meaning of Apple's cash position. This is clearly no freely disposable cash serving no strategic function, but nobody seems to be able to make sense of it.

  • valueinvestor69

    Nothing to do with SJ health. iPhone is 65%+ of the profits. Android is driving down costs of competing smart phones; gaining share rapidly. Wall Street sees this and is concerned. Unwilling put high multiple on vulnerable profits.

    • asymco

      I've seen comments on this board explaining with clear logic why consumers are not as stupid as some companies make them out to be. At the same time I see comments like this which suggests that "Wall Street" is chock full of stupid people.

      I don't buy any explanations that are rooted in assumptions about large numbers of people being stupid.

      • valueinvestor69

        No one suggested Wall Street is stupid. They may not think the way you do, but that doesn't make them stupid.

      • asymco

        My point is that Wall Street would be very foolish if they thought that Apple's profits are vulnerable. And in any case, Apple's P/E crashed during the recession, before Android appeared and has not recovered. Throughout that period Apple's margins expanded and growth has accelerated. You can look at competitors, comparables, fundamentals and macro issues and not find a explanation that makes any sense. I don't throw up my hands and say that Wall St. must be confused. I pin my explanation on the uncertainty regarding the CEO.

      • O.C.

        But you know what they say:

        “Insanity in individuals is something rare – but in groups, parties, nations and epochs, it is the rule.”

      • FalKirk

        "I don't buy any explanations that are rooted in assumptions about large numbers of people being stupid."-Asymco

        I think that this statement is very insightful. It really made me think because I fear that I may be one of those who has, at least occasionally, fallen into the trap of explaining things by assuming that large groups of smart people are stupid. I shall try to refrain from making this mistake in the future.

      • valueinvestor69

        Yes, clearly only a few insightful posters on this blog are smart. The rest of us, including "Wall Street" are just stupid. But at least we have a place here to get educated.

  • http://twitter.com/judsontwit @judsontwit

    I think it's hypocritical.

    Who cares about worrying about the future of the company's plans, regardless of Steve Jobs' health? Other tech companies perform much poorer than Apple does in profit, revenue, customer satisfaction, every category — so if Apple loses it's leadership, it will only become *as unremarkable* as every other company, right? Do analysts think that because Apple is performing better than every other company, it will soon perform worse than every other company?

    You have to wonder, why doesn't the stock market have more doubt in other tech companies, who without doubt perform worse than Apple? It says more about the market, the industry, and perhaps the entire economy, than it does about Apple.

  • JP Chicago

    Roughly 70% of Apple shares are held by institutions. I think this may be a reason for the low valuation. Apple shares may be 2% of a US large cap fund's portfolio for instance.

    If Apple stock reaches fair valuation too quickly, institutions would see short term volatility and less investment opportunities for the future.

    Institutional investors are reluctant to buy a stock at fair value because they have accumulated many shares at lower prices. They are also not willing to sell because the shares while they are undervalued. They all want to continue to accumulate Apple shares at low PE multiples.

    If individual investors held onto their shares, institutions would have less supply to hold prices down. Volume has not been impressive suggesting that share prices will be undervalued as long as there are some individuals willing to sell their shares for a bargain.

  • http://twitter.com/_ChrisHarris @_ChrisHarris

    I'd like to throw my 2 cents as why Apple are undervalued by the stock market.

    I think it's because Apple's products are 'cool'.
    Yeah, I know, bear with me…

    If we take some other industries that trade in cool, like the music or film business, we see that they are quite volatile. Take Coldplay for example. Early on they we're the coolest band around, now (in England at least) they have lost a lot of that magic, despite producing profitable music. The film industry is similar. See how ''Paranormal Activity' or 'The Hangover' became an overnight successes that noone saw coming. They we're the cool films of the moment.

    The point I am trying to make, is that investors *may* believe that Apple's good fortune is based in part on the cool factor. If people think their products are cool now, what about next year? If they lose that magic factor, that mystique, (a large part of which is due to Apple's iconic leader) we can see how investors may be pricing a possible fall from grace into their valuations.

    Cool is something that is hard to conjure, and harder to repeat. Apple is easily capable of continuing to hit home runs, but the stock price may show how the market views this bet.

  • Davel

    I too am perplexed regarding th pe of this company.

    My conclusion is that most analysts just don't get the company. They always are looking for margin compression and the next apple killer.

    A lot of it I think has to do with price if apple would split to get the stock to 40-50 it would bring in a lot of little investors which would drive volume and price. All the institutions are already in.

    All the apple haters are on board after getting killed with their negative analysis getting laughed at.

    In the end the professional investors mostly do not get apple just like apples competitors do not get them. They can only follow apple which means apple will have the first mover advantage and the stock price will be lower than it should be and be subject to volatility.

  • Laurent Giroud

    It could also boil down to simple brand loyalty.

    Take the population of people rich and knowledgeable enough to own stocks. It divides into two subcategories: people who own Apple products and people who don't. It would be interesting to study the motivations behind that choice (owning *not* an Apple product) but the fact is this probably plays a huge role when valuing the company.
    I hear people at work everyday who hate Microsoft with a passion but would never dare to buy an Apple product simply because in their eyes only a PC or non-Apple phone/mp3-player is a serious product, this without having ever tested one extensively. Apple isn't quite a standard company, it's not the norm and that's enough to prevent some (a lot) of people to avoid it — to their own detriment.

    I'm pretty sure this reverse brand loyalty is at work on Wall Street too.
    Unless you're an Apple product owner you have no reasons to understand why Apple products sell and by extension why the company is so successful: they are left with the numbers and their existing preferences/prejudices. Sociology has told us multiple times who wins such a match.

    One way to determine whether this hypothesis holds water or not would be to quantify the percentage of Apple product ownership among investors and derive how it influences (as of now) their investing choice. Since the proportion of people owning Apple product is growing we should thus be able to accordingly forecast the variations of the the P/E.
    I guess that might be something that Apple investors would want to integrate to their models :).

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