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Is Android responsible for Apple's deep market discount?

At last night’s closing price Apple was trading at a P/E of 16.3. Excluding cash that ratio was at 13. On a conservative forward basis (my estimates) the stock is priced at less than 10 times next twelve months’ earnings.

These figures show a remarkable pessimism that has persisted around Apple for years. It was slightly, but not much, worse during the great recession. It persisted whether the company was growing at 30% of, as now, 95%.

There are many hypotheses about why Apple’s earnings and growth are considered worthless. They come and go with the whims of the age: recession, elitist, luxury branding, health issues, macro “headwinds”, earthquakes, phantom competition.

Lately it’s become fashionable to blame Android. That’s a curious thing to me, because Android has been discussed at length here and it has been shown to be, for the time being, benign. Apple has not “lost sales” to Android as it has been selling all it can produce. In some ways it’s been a boon as a co-belligerent against non-consumption.

The argument that the discount is in effect because of the future of Android has one first strike against it: the fact that the market does not often discount the distant future. Capital markets are notoriously incompetent in spotting disruptions and often reward those who are failing right up until the bitter end.

But let’s take the “Android hypothesis” (i.e. that Android is causal to Apple’s share price) seriously and analyze it. How could the impact be measured?

Since Apple is trading at a fraction of (a) historic multiple (b) multiple based on growth (c) comparable companies’ multiples then we can assume that a “normal” valuation would be twice the current (i.e. a multiple of about 32). That would still be a discount to growth and history but it would begin to match some of the comparables. A doubling of the P/E would be a good start.

But a multiple of 32 would imply a doubling of market cap, which means that the Android hypothesis is causing the evaporation of about $300 billion in future profits. So it stands to reason that it’s responsible for a $300 billion destruction of Apple shareholder value.

That’s an interesting number since Google itself is only worth about $169 billion.

The measurement then presents a remedy: If Apple bought Google (it already has a third of its value in cash) and it shut down Android, it could create $300 billion in value. If could even throw away all of Google and still walk out with a profit.

Seems like a great bargain.

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

    I don't think Android is the culprit – as you rightly say the reason for Apple's low valuation seems to vary with the seasons. One minute it's Steve Job's health, the next minute it's iPhone 4's antenna issues. Apple innovates in so many markets, and I think Wall street sees this as a vulnerability instead of a strength.

    As with it's hardware and software products, Apple's business activities seem to have to withstand the most ridiculous levels of scrutiny. There are always hoards of vociferous naysayers all too ready to cast fear and doubt into the ears of investors too.

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

      Good points but …

      AAPL did not take any noticeable dips during AntennaGate. The stock recovered quite soon after the dip it took at the announcement of Jobs' first leave of absence, and barely dipped (did it even dip?) after the second announcement.

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

    Beautiful insight, Horace!
    I've thought about this and think there is an anti 'Steve Jobs effect'. That is, analysts and institutional investors think Steve Jobs is engaged in some sort of magic — which cannot last and will be exposed, and that Steve Jobs is repeating 'mistakes' from his past such that at any moment, iPhone will become marginalized and Android will become the Microsoft of the smartphone world. Given how early in this dynamic market we are, this represents a huge disservice to clients who could be benefitting from owning (more of) $AAPL.

    • Hamranhansenhansen

      Funny how they stop the story at 1995, and don't recognize that Steve Jobs came back to Apple and earned back everything Microsoft stole. It's easy to steal but hard to keep what you stole. Apple is not just on top of phones, they are on top of PC's. Even before the iPad they were the most profitable PC maker, but now they are also threatening to be the highest volume maker as well. So if the fear is that phones will become like PC's IT ALREADY HAPPENED. The iPhone and Mac both sit at the top of the market taking all the profits. HP and Dell are making low-margin servers that serve content to high-margin iPads, which is a PC. And we have not even seen the low-end iPhone yet, which will be like iPad is to Mac.

    • Robert

      I like these points too… But let's also consider that a hangover contingent from the PC war days still believes that all this growth through sales into new markets, not to mention historic levels of Mac sales, is simply from some mythical entity such as "the apple faithful", or the more derogatory, "fanboy".

      Even the well known VC Fred Wilson used the derisive label for the 10s of millions of Apple consumers. It's absolutely absurd, and somewhat, dare I say, delusional.

      • Mitch

        Sadly, I see some truth in this, though in fairness it's not quote the same as ten or more years ago, when Apple's customers were commonly seen as having not heard the news about the company being completely irrelevant, or at least vaguely deranged. So I guess it's official: Apple is now the world's largest cult.

      • KenC

        So, in a nutshell, the market is irrational because it is composed of supposedly smart people like Fred who dismiss Apple as some sort of outlier. The question boils down to who is being irrational here? Us or people like Fred?

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

    How much of this penalty on Apple is due to market's acrophobia? In other words, the market is looking down and seeing how high Apple's market cap is, and not looking up at its potential based on fundamentals?

  • newtonrj

    Horace,

    I applaud you for opening this issue to an open forum.
    - The SJ effect is notable, but not overwhelming IMHO.
    - So is the cash hording. Wall St hates cash they don’t have.
    - Apple is unpredictable – Meaning they don’t telegraph but also are not dependable from investors POV.
    – I might also add that Apple doesn't seem to want to make money, instead focusing on great products. Investors don't like a company that doesn't see making money as paramount.
    - Apple doesn’t make anything – as we have seen, they are a design shop with great ideas and a now a couple hundred very well designed stores, but are they an asset?
    - Where is the Apple value/liquidity?

    Taken individually, it is not significant. Taken as a whole, without a fanboy passion, it could help explain.
    -RJ

    • AC88

      Apple is hardly unpredictable.
      They roll out new product updates with incredible consistency–iPods in September, iPhones in June, iPads in the Spring, and larger announcement sin January. They've done so for years, and the anomaly that is the rumor around iPhone 5 speaks to that as an exception that proves the rule.

      Apple does want to make money,
      But they do not want to make it the way that Dell or Acer or Lenovo or Motorola do (among others). Making great products and making money are not mutually exclusive. I think the profitability story bears that out rather clearly.

      Apple does more than design features and products.
      Apple designs products, services, experience, business models and arguably it has leveraged its design competency in and across the entire enterprise–from the supply chain to services.
      Is there value in that? Yes.
      At one time long ago, Jobs thought that he could design products and get others to run the company (nearly into the ground). Today its Apple as an enterprise as much as any product or service that Jobs & Co, have designed with the same attention to detail and the same balance between technology and liberal arts that can be found in its fonts. There might be an asset in there somewhere.

      • -Rj

        I think that Newton was saying something more along the lines of "Apple look different to the average balance sheet". This isn't a bad thing per se but to the average investor that doesn't understand the market that Apple are in, it's only logical that they assume different to be a problem. More specifically:
        * Unpredictable in as much as they don't announce what is going to happen.
        * Don't concentrate on making money first and foremost, ie aren't prepared to sacrifice products to profit.
        * A big, well-run and incredibly effective design shop with manufacturing capacity… their only real assets are their cash and IP. No plant & equipment to speak of, etc.

        Rj

      • unhinged

        Not to mention the advice from Warren Buffett to not invest in what you don't understand.

  • Ted_T

    My sense — Android has little to do with it.

    I think that many investors simply don't believe that Apple's success is is sustainable. Having once given up Apple for dead, they still haven't overcome the cognitive dissonance of it being well on its way to become the world's most valuable company.

    The more logical reason for this disbelief in Apple's continued success is that they don't understand it. To them a successful model should be reproducible, and yet Apple's competitors fail, time and again, to reproduce any of it.
    A large part of Apple's success depends on continually inventing new product categories/products which is unprecedented and incomprehensible to many investors who can only look backwards.

    Another factor is that many of the large financial institutions, and funds of various kinds including state/municipal owned pension funds that invest in equities don't use Apple products or use very few of them relative to those of Apple's competitors, so they simply don't get where the sales are coming from, and are presented with yet another cognitive dissonance.

    Lastly, something that does make (some) sense: More than 50% of Apple's earnings come from a single product, the iPhone. Yet unlike Microsoft with Windows/Office or Google with search/adwords Apple does not have a smartphone monopoly and thus has to compete on a more even field and thus is more vulnerable to challenge than Microsft/Google are in their cash cows.

    • davel

      I will echo what you state here.

      I think you beautifully sum many of the winds against an objective valuation of Apple.

      Let me add the refusal to provide a dividend incenses those who scream for one and are ignored. Same as with their cash hoard. Then of course there is the stock price which would bring in more shareholders who could buy 100 share lots.

      Many players in the market like to perpetuate the myth that the markets are rational and fair. Many times they are not.

    • hoomie

      I also sense that these same fickle investors seek reassurance of another iPod in terms of both sales and market breadth, and demographic ubiquity. In other words, they're sitting tight on further news of growth in the iPad, as they don't seem to truly understand the growth of the iPhone, especially now that it's constrictions are vanishing one by one.

    • Hamranhansenhansen

      Apple is ahead of their time, so investors don't get it.

      If you invest in movies, you think movie making is a crapshoot. So many movies suck. But Pixar does hit after hit because they prototype every movie first. Before they even start production, the movie prototype has to make everybody weep with joy. So they don't make any bad movies. They made good movies reproducible. Other movie makers go out and shoot and shoot and they cross fingers and hope there is a movie in the can they take into editing. If there is not, too late. Crapshoot.

      In phones and PC's, everybody but Apple is thinking one quarter ahead, pooping out crap products. Every once in a while you get something decent because somebody got lucky. With Apple, they're not getting lucky, they are designing and prototyping until they have a great product, and then they go into production. Good products are reproducible that way.

      So Apple and Pixar can keep having hits, but investors are used to investing in crap shoots.

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

        I still see evidence of very strong group-think, described above by Waveney. Many analysts and tech writers continue to try to "normalize" Apple by comparing its business with things that Microsoft did 15 years ago, and base their recommendations — to investors, consumers, institutional clients, enterprise IT, and Apple itself — upon the only model they seem to understand, or want to understand.

  • Tytus Suski

    Or maybe it's just hard to believe that Apple might be worth more than Exxon Mobil.

    • Joe_Winfield_IL

      Apple is not subject to massive regulation, is not blocked from future acquisitions by antitrust concerns, does not take risks with billions of dollars and dozens of human lives with each project, and does not have realistic concerns about destroying the world's oceans, air and forests. But more importantly, their products are not easily commoditized. The price of iPads won't be affected by Nigerian elections or Libyan civil war. Nor are it's competitors able to produce the EXACT same product, Constsntly seeking the delicate balance of corporate supply with global demand. Apple does not have to compete with both multinational corporate peers and state run sovereign oil trusts with different objectives. Apple doesn't run the risk of having its R&D usurped by the dictator of a foreign land. Apple executives don't have to testify before congress after every
      blowout quarter, as though their success runs counter to the national interest.

      In short, I'm sick of the XOM comparison. Besides all that I just listed, it's patently irrelevant what marjet caps other companies have. In a vacuum, market cap is a meaningless metric for comparing unrelated businesses. Investors are not deciding between AAPL and XOM with each incremental dollar, debating which market cap to support.

      • unhinged

        Well, investors might be, but they're not being rational when they do. :)

  • Teddy C

    Funny, I was thinking the same thing this morning (LBO of Google). I had never really thought of it before, but it would provide a case for hoarding so much cash wouldn't it? I guess that would be a throwback to when Larry Page wanted Steve Jobs to be the CEO, just arranged in a little different manner!

    Going into earnings, I was hoping that great iPhone numbers would end the 'Android threat' argument against the stock and perhaps we will see it soon when this percolates through enough skulls. Still, I'm not really 100% sure that is that reason for Apple's valuation. Apple's single digit forward P/E is laughable for a company growing like this. It actually borders on stupid when you a name like Apple is within the sights of 'value investors'. If this 'iPad thing' would actually catch on with buyers, you would almost think this company had a future.

  • David

    I thought that the recent fall in Apple's share price was probably caused by the NASDAQ 100 rebalancing announced in early April to take effect on May 2. Does anyone know whether tracker fund managers have finished adjusting the makeup of their funds yet? Those that have waited will get a nice additional bonus in the funds realised.

  • russell

    Horace,

    You make a good point with, " Capital markets are notoriously incompetent in spotting disruptions." I might add to this and say, they are even more incompetent at placing proper valuations on the few companies that win really big in these cylces.

    If Apple had a $50 billion market cap today with its current postion in this cylce, i believe the market would reward it with a p/e in triple digits at this point. That line of thinking leads me to believe the current mkt cap is a significant part of the problem that many can't get past for now.

    Apple's cash has got to be taken into account at some point. Buffett says, "The market is a popularity(less popular for apple) machine in the nearterm, but a weighing machine longterm."

    Nice fresh look at google in the equation. i've never thought of it in this way.

  • MattF

    I think the problem is that Apple is now both very big and growing very rapidly. I suspect that if you look at a sort of 2-D 'value state space' where a company's position on the graph is determined by value and rate of growth of value, Apple will be all by itself. It's not unreasonable to regard this unique state as risky– or, at least, as somewhat mysterious. And the great majority of investors are not interested in risky or mysterious.

  • gctwnl

    Very funny. This assumes of course that removing Google would let investors not pick another reason for undervaluing Apple. And it would not be Apple that profited (in theory) but its share holders. That money is not in Apple's pockets unless they give out extra shares. So, what they could do is fund the purchase of Google by handing out new shares for B$200. They would then shut down Google, but the end result for the diluted shares would be not that much if all of the $B300 market cap could come true. Around a 20% rise if investors just think it is Android?

    But given that Android is Open Source, could it at all be 'shut down' by buying Google?

    • unhinged

      That comes down to who is performing the majority of the development. Google is currently the maintainer, so one of the other OHA members would probably be likely to step in.

      But who has the software chops to maintain Android to the standard Google currently does? Members of the OHA joined precisely because they can't create their own software anywhere near as well as they can by partnering with each other and with Google.

      So I think Apple buying Google and shutting down Android would effectively kill the product.

      I also think it will never happen (for sufficiently ambiguous values of "never"), because Apple is making money hand over fist even with Google in the picture.

  • Nicu

    During the last year (or two) AAPL had to lift by itself the NASDAQ (about 20% of that). You know, NASDAQ are those other lazy tech companies that wait for Apple to show them what to copy !

    Before this situation is over on May 2, there is one more hurdle : rebalancing means large portfolios have to adjust, either because they follow NASDAQ or directly by the ownership of QQQ. Add to this the fact that most large investors do not want just one stock to represent too much as a % of their investment. So AAPL is punished mechanically for its strong growth. Sadly, this second effect will not end on May 2.

    Here we see that the theory of efficient markets is rotten at the core and that WS is just huge herd of clueless sheep (and probably some dizzy wolfs).

    PS: boy, we were really wrong on those iPad numbers !

  • Hagelin

    "Apple has not 'lost sales' to Android as it has been selling all it can produce.”

    Except for the iPad, where they can’t meet demand, this doesn’t make sense to me. They stated in the earnings call that they increased channel inventory for the iPhone. The production meets the current demand. What’s the basis for the assumption that they couldn’t increase production of iPhones they thought it was necessary?

    • asymco

      The increase in channel inventory was necessary because there was more of a channel to fill. In other words, Verizon needs x weeks of stock on hand. You can't expand with 2000 new points of sale without inventory.

      • Hagelin

        Sure, so are you saying that the unmet demand is in markets they have yet to enter (geographical or otherwise, such as until recently the CDMA market) and that if consumers are choosing Android phones in market X it doesn’t matter because if additional production was possible Apple would be using it to expand into market Y?

  • davel

    The most compelling argument against a rise in Apple's price is the 'what goes up must come down' argument. Apple has a huge market cap and has been growing at enormous rates for some time.

    The best argument against the stock is that it cannot continue because history shows that stocks like this fail. I think the problem with the other failures is that many of those companies engage in financial twister methods. Apple is fairly transparent in its finances. You do not see periodic financial gimmickry that refers to repetitive one time events that other companies like to use.

    I do not buy those arguments, but it seems this is the one compelling argument against the stock.

  • Senator Gronk

    Just like English majors that concoct the most ridiculous conspiracy theories simply because they are jealous of Shakespeare's genius… The market refuses to accept Apple's genius.

    Apple is a singular example of American Exceptionalism. And yet the WSJ's of the world that can't get enough of that stupid idea can't get their heads around the one company that actually embodies it.

    Isn't it wonderful that Apple is bigger than Exxon with no ringers in government regulation agencies? That it continually outpaces Wall Street without whining about taxes or regulation?

    • r00tabega

      Gronk, keep in mind that Apple doesn't whine about taxes, but it's cash hoard is managed by Braeburn capital (which is a tax sheltered corporation based in NV).

      But Apple's lack of whining (for more subsidies/taxbreaks) and departure from the US Chamber of Commerce (which essentially is a front-group for corporate welfare queens) is very commendable.

  • Cat

    It could be that Apple is responsible.

    The growth and the speed of their growth is unprecedented, for such a big company.

    1. "How can someone defy the gravity?" Disbelief towards continuation of such a success.
    2. Marketplace technicalities. In Apple's outstanding shares, 70+ % are currently owned by institutional investors and mutual funds. Many of them have rules for diversification. With AAPL performance of last two years, there is pressure to sell. This as well as NASDAQ indexing play affect the marketplace, the demand-supply balance slows the growth of AAPL price.

    • hoagus

      This is the most likely scenario. Think supply and demand (for shares). Most of the demand for shares is institutional.

  • r00tabega

    Apple doesn't do well with marketshare (except for iPod), but it's profit-share has always been top-notch.

    Does everyone want BMW to lower prices (and quality) so they can engage in some pissing contest with Toyota on the number of wheels each of them have on the roads?

    I sure wouldn't. Why then, would they make the same mistake for Apple?

    • russell

      i agree with your point and believe apple is following the right stategy. What i'm really wondering is once supply is more in line with demand, will Apple behave more like a Google or Microsoft and begin to steal market share from the rest. I think a lot of money would come off the sidelines once this started.

      However, this theory will have to wait its time until the supply/demand stabilizes. I hope this makes sense.

      • asymco

        The cycle time of innovation on major new product categories is faster than the time it takes to ramp global distribution. For example, it might take 5 years for a completely new product/platform to exhaust itself and become obsolete in mobile computing but it might take 8 years to that platform to be within reach of the whole world's potential addressable market.

        Distribution of physical goods is not scaleable as quickly as the innovation (i.e. technology replacement) model that Apple is able to implement with an integrated approach.

      • Trillot

        It explains why Android spread the market so quickly: it was adopted by companies already on the phone market, it was only a substitution on their previous Os.

        On the opposite side, Apple had to conquer a new land for it: the telephony land.

        And it will last many years for Apple to spread all over the world and convince investors to buy Apple shares.

    • unhinged

      History. The technology and computer industry had one freak event that was so massively beneficial for one player that there is still a lot of "common knowledge" that says _all_ computer markets will have the same result. People see that MS has the ridiculously large market share and correlate that with investment-worthy success. People see Apple as being market share agnostic (at best) and worry that they don't make a good investment.

      • Sander van der Wal

        Are you sure about the freak event (Windows)? What about the physical network topologies? Ethernet won that one. What about processors? Intel won that one. Aren't these all examples of the network effect adding value? And ins't that network effect what Android supporters are counting on? And isn't the same network effect being used by Apple when they increase the iOS platform's reach to tablets and tv's, next to smartphones and smart mp3 players

  • Russ

    Objectively speaking, here are the reasons I see for Apple's somewhat depressed valuation:

    1. Market Cap – When you start getting over $300bn valuation for a growth stock, the market can only see what can go wrong and not what can go right. The other side of the equation starts to think about how Apple moves the proverbial needle in a meaningful way and innovates another multi-billion dollar product out of thin air. If everyone was so imaginative as to understand Apple's potential and what their future could hold, then Apple wouldn't be revered the way it is.

    2. Market transition speed of mobile technology – With a majority of Apple's revenue coming from product lines that didn't even exist 5 years ago, the market feels that rapid change in innovation or user taste could mean the extinction of these product lines five years from now. Their moat is considered narrow when compared to heavy capital investment industries.

    3. Steve Jobs health…..the market perceives him as the only guy in the company who has vision combined with empowerment.

    4. History – The market believes that we are seeing the second coming of Windows vs. Mac and that Android will play the role of Microsoft this time around which stimulates #2 above.

    5. Ecosystem Commoditization – As the important apps to consumers achieve maturity across all mobile platforms (i.e. Facebook/Twitter/etc), Apple will either need to sacrifice margin in order to maintain market share or maintain margin and lose market share. Losing market share stimulates fear of losing developer relevance and reducing margin highlights that the golden age has passed.

    Just some thoughts.

  • r00tabega

    I think your hypothesis combined with "vertigo" statement above (too high market cap) and "rebalancing" (try not to own too much of one given stock) is what's causing this lowering of P/E on Apple's biggest quarter yet.

    There are a lot of things about Apple that defy "common wisdom" yet have worked for the company for years. To many on WS, this smacks of "having faith" with Apple, and they aren't comfortable with that.

    It could also be that Apple with it's large cash hoard represents a threat to some institutions (as that makes Apple immune to short-term leash-pulling by activist financial groups).

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

    I wonder if the market discount is also related to fear and price.

    $350 is an expensive share, never-mind $500…

    Also a shareprice of $500 makes them the biggest company in the world…. by market cap… I think conceptually people just have a problem with that. They could understand if it was Microsoft or Google because they had/have a monopoly on OS/search… but they just don't understand how they are making so much money out of consumer products. It's been a long time since any physical consumers products had massive market share… iPhone, iPod, iPad…

    Windows has massive market share but not any one PC manufacturer…

    • asymco

      I think Berkshire Hathaway shares are priced in the tens of thousands per share. Are people afraid of them? Also consider that Warren Buffett isn't getting any younger.

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

    What if Apple split the stock 3 ways…

    A straight psychological move.

  • CndnRschr

    Perhaps the market still thinks like Michael Dell did 8 years ago when he suggested Apple liquidate its assets and give them back to the shareholders. Clearly, Apple is an out-performer but, as others have suggested, their secret sauce is a mystery to investors (aside from thinking the product designs are somehow communicated to Steve Jobs from a higher being through his green tea). The problem is, as HD points out, you can dissemble Apple to understand how it got to where it is with pretty good detail but no one seems willing to extrapolate beyond their toenails. Hence, the solid ecosystem with in-built synergies (OSX and iOS), economy of scale, network of bricks and mortar outlets, upgrade cycles, customer satisfaction levels and pre-purchasing agreements are somehow ignored. The future in Apple's case is highly predictable. However, they didn't safely predict Apple's performance 10, 9, 8, 7, 6, 5, 4, 3, 2, or 1 year ago so why should they start now? Apple is a misunderstood prodigy, an exception to their rules. Interestingly, its RIMs co-CEO who do all the moaning about being underpriced. Who cares if the share price should be higher or not (aside from current investors who have a vested interest)? What is more important is the stability and direction of increases in value rather than the pace of change. A sudden increase in share-price would trigger all sorts of automatic selling. Apple is living with its share price and so should we.

  • kevin

    Article at http://dealbook.nytimes.com/2011/04/21/a-shopping… has Yair Reiner suggesting again that Apple's excessive cash is being penalized. I know HD dealt with this before in another post, but wanted to point out that WS is still giving it as a reason for the low PE.

    • asymco

      So the logic is that if Apple removed an asset from its balance sheet, the company's future earnings would be more valuable?

  • KenC

    About that cash, remember that about $38B of that is in foreign subsidiaries, and not with the parent company in the US. For that cash to come back, Apple would have to pay the balance of US corp taxes of 35% on it. Apple is probably not hoarding that foreign cash, for any grand takeover, but mostly for tax reasons. They also can use it to prebuy component supply. Yes, I know Horace's point was hypothetical, and not really serious, but I thought I would just point out that we should be looking at the US-based cash, of about $28B.

  • Hamranhansenhansen

    The big problem is Google's employees outnumber Apple's by 2:1 That's tough to assimilate. And Google has no designers, while Apple is run by designers. But then again, Steve Jobs could task the Googlers to put up nationwide Wi-Fi. Make themselves useful.

    I would love to see the Google products after an Apple redesign! Would it even be a redesign or just a design, since no initial design was done?

    But I think the market would just find a new Pepsi to Apple's Coke. A new villain. That's the narrative they want.

  • Ted_T

    Open Office is hardly sweeping the world.

    You do have a point in that Android source is out there and so are a whole bunch of Android agreements Apple can't just abrogate after buying Google. On the other hand the likely result would be Android forking and diverging rapidly.

    Lastly I know that the Justice department's anti-trust division is asleep, but really, could even they swallow Apple buying Google and knifing Android?

    • Addicted44

      Europe would certainly not allow it. Not sure how much say they have in this matter though

  • chandra

    But why is it such an impossible intellectual struggle for so many informed or at least interested people to understand the reasons behind Apple's escalating and, for five years at least, sustainable success?
    I don't claim to understand all the dynamic influences at work, but the core drivers of Apple's success are few and relatively simple.

    MARKET SUCCESS
    • It's products are seemingly an enduring definition of (dare I say) cool design that works and lasts and causes buyer's joy rather than remorse. The products are highly desired items.
    • There is high demand for everything they sell.
    • Their products often define CE or computing the category they sell in. They are the 'to die for' products in many cases.

    BUSINESS FRANCHISE SUCCESS
    • Demand for the popular CE products tends to match Apple's ability to supply, except immediately post-launch perhaps.
    • Apple is THE technology brand.
    • It is beloved by young and old alike
    • There is a religious fervour around all things Apple which reflects a kind of loyalty, abhorrence, fascination and admiration according to your bias or nature
    • Goodwill is Apple's greatest asset. It pulls in people who value quality, service, value and integrity.
    • Apple still has something of the maverick about it, but now it only adds to its stamina – it is forever young and productive because it remains a startup at heart and its only real creative competitor is itself.
    • It understands what its market wants like no other company.
    • It is content to pursue profit, not market share and it leaves the crumbs for the bottom-dwellers
    • It is brutal about its mission for excellence, rejecting new ideas and deprecating old technologies into obsolescence
    • It believes in giving more for the same money or less in its product evolutions
    • It has raised itself to become a leading brand in tech and this is reflected in residual values of its products. Yes, there is a need for stratification by quality in tech – for a Mercedes Benz or Omega in computing/digital devices
    Single-handedly, Apple has taught the digital devices consumer that quality matters and saves you money in the end
    Apple is strategically very clever in ways that none of its competitors can match. How could they risk a tablet when tablet computers were a joke of 10 years duration? Because they knew that although it was a new device, it was at once familiar to everyone who had experienced an iPhone or iPod Touch.
    • Apple dominates the mid to high-end of the product areas it competes in. That is why it gathers most of the profits to be made in each category.
    Their products can never become a commodity because their secret sauce elements are usually uncopyable
    • much more to say here.

    MANAGEMENT/FINANCIAL SUCCESS
    • Apple is simply the best managed company in the world. It defines the art of corporate stewardship.
    • Apple leads tech in product profitability across all its products.
    • It is a bit player in phones and computers and the leader in PMPs and tablets. It is winning share in phones and computers and this gives it ample headroom to grow; to keep on keeping on doing what it is doing today and so profitably
    • since the arrival of Tim Cook, Apple's operations have become lean and water-tight. They buy-in better. They control production with accuracy and finesse. They have no inventory problems other than shortages due to others' ability to meet their volume requirements. the days of warehouses full of unsold and often unsaleable inventory are long gone.

    SUSTAINABILITY OF UNBELIEVABLE GROWTH
    • Well, they say that if you build a better mousetrap, the world will beat a path to your door. If you start from a position of being a minority market share holder, but that share represents the cream of consumers and profits, the rest of the market is theirs to win. And they are winning share quarter bu quarter.
    • Apple has no true competitors. I mean this in the sense that, with the very high profit margins they enjoy, and their procurement and engineering prowess, they could serve the lower end of the market at any time and they would decimate almost every other player who could not compete profitably. Apple won't do this of course although the iPad demonstrates that they easily could. I believe Apple prefers to pull most consumers upmarket, gradually and with no pain.
    • How could they possibly stumble unless they become careless slackers or some new Steve Jobs appears with an upstart new company that pulls the rug out from under them. Unlikely though since Apple is the self-same bunch of start-up entrepreneurs trying like hell to impress each other.
    I'd better stop as I feel an essay coming on.

    Chandra

  • http://www.dimspace.com Ben

    I think that the main reason that the stock isn't going higher at this point is that people are nervous at this level. Even with ETrade and their ilk, people still like to think of buying stocks in blocks. Who can afford to get in on a $35,000 buy? Who wants to buy just four shares with the $1500 they have sitting around? I think Apple could spur huge growth with a 10-1 split.

    And there are other elements. At this high level, there's a psychological factor of, "this streak's gotta end," at least in the individual investor market. Again, I think a split could dispel a lot of that.

    But I think Apple's actually probably happy with the plateau for the time being. They're hugely profitable with a huge cash horde. They can pretty much buy whatever they need outright. As long as operations are going well, then keeping stock valuation growth slow-and-steady will keep from their stockholders–especially small speculators–experience shorter term boom and bust cycles.

    So I don't think there'll be a 10-1 split any time soon. Nor will they start paying a dividend, which would also drive investors to snap up more AAPL. If anything, I could see a 2:1 or 3:1 split coming down the road, but I wouldn't put my money on it unless the price stagnates at 350 or below for most of the next year.

  • DavidKStevenson

    I think the root of the problem is the Apple is mis-categorized as a gadget company and a niche company. The problem with gadgets is that they are based on fads which come and (as evidenced by the declining iPod unit shipments) go. So now over half of Apple's revenues stem from gadgets (iPhone, iPad and iPod). Compare Apple's market cap with serious companies like Exxon, Microsoft, etc. and you see the problem. And the Mac is a niche product, has been for 20+ years. And nobody knows how big this niche can be. And if that weren't enough, all of Apple's products are are luxury goods, so there is a glass ceiling to their addressable market, and nobody knows how low that ceiling is and when Apple will hit it and it's explosive growth will come to a grinding halt.

    And everybody knows that Apple's success is based on marketing and hype (and fans), and how fragile that is. And then there's "Steve Job's Health," which is short hand for "I don't have a clue how they keep on generating hit gadgets so it must be Steve Jobs."

    I think that AAPL is at the start of a PE compression phase: that as its revenues rise the PE will decline, probably for the next few years (3-5, perhaps), that it will take that long to get over the gadget/niche hurdle. What it will take, I don't know, but it's probably tied to Mac market share (higher than HP computers, maybe), and the iPad moves from gadget to useful computer status (and a major market share) with some killer productivity apps to make it a serious product. Of course, if Mac contribution to earnings falls to less than, say 5%, then its market share will be irrelevant (just look at the professional software's contribution to earnings for irrelevancy).

    • neutrino23

      I disagree that Apple makes luxury products. I don't think of any of their products as luxury goods. They make solidly designed electronic goods that perform extremely well. These are indispensable to many people in many lines of work. What Apple doesn't make is cheap goods where every penny has been wrung out of the cost like Dell and HP and Lenovo. In business, if all you need is to have someone enter numbers in Excel all day long then a low cost Dell may make sense. If you are in the sciences or arts where you need to be a little creative and where you personally need to rely on your devices then Apple products make sense. Note that HP, Dell, et al also make computers costing over $1,000, they just don't sell very well.

      The iPad is taking the business world by storm. Take a look at the Medtronics video on Apple's site for a good example of how a large company can make use of the iPad. I'm seeing them used more and more by staff of large companies.

      The iPad is not a static idea. This is just the beginning. It is at the start of its S curve. The weaknesses will be filled in and new features will be added. Within a few years I'll bet that most people will just have an iPad and a minority will be purchasing new desktops or laptops.

    • asymco

      Apple had its highest P/E ratio when it was an iPod company–a gadget if there ever was one. Apple today receives over 90% of its revenues today on the basis of platform products (iOS and OS X). These are products which create value for Apple and a vast number of ecosystem participants. A far more robust business model than the iPod (which although based on the iTunes platform, that ecosystem had a handful of beneficiaries.)

      By any half-serious analysis of the quality of earnings and sustainability Apple today is far better able to grow than the Apple of 2005 when the P/E was 3x higher.

  • Steve Weller

    Since P/E is measured for the trailing twelve months and E has been getting bigger during that time, the current calculated P/E is artificially high. Even assuming constant P and E going forward, the P/E would fall over the next twelve months as the data caught up.

    But APPL continues to grow rapidly, so trailing P/E will be seriously out of whack for some time to come.

    • KenC

      The way your wrote the above, reminds me a bit of how one had to describe Apple's deferred revenues a couple years ago, after the iPhone launched. People just didn't "get it". You can explain and explain, but people think you are doing some financial voodoo.

  • JonathanU

    It would be impossible for Apple to acquire Google – anti-trust issues abound given Android is Apple's main competitor in smartphone space.

    No idea why they would buy Disney nor Sony. Neither seem a logical fit.

    • asymco

      I don't think that there is a strong case for blocking an acquisition. Google and Apple have almost no overlap in their businesses. Android is being given away. Apple could guarantee that it will remain open source, just no longer be maintained by Goopple.

      • Ravi

        Even if you got past the purely legal anti-trust issues (which I highly doubt), there's another "anti-trust" problem a Google acquisition by Apple would face: AT&T and Verizon (and, in this instance, Sprint and, if they still exist, T-Mobile). None of them would stand for (effectively) having only one supplier of smartphone platforms (since all of the other platforms are insignificant and/or shrinking). I don't know how they'd choose to exert their influence (lobbying, demanding an Android spinoff, renegotiating existing smartphone contracts, etc.), but they have more than enough influence to kill an acquisition aimed at ending Google's development of Android.

  • Plist

    Everyone needs to atop worrying about what aapl is. If we can agree the P/E will stay roughly within the conventional norm of 15-18, the apple’s profits will force the share price up.

    So the share price will follow the profits rather than anticipate them…if you are long aapl, who cares how it get there as long a it gets there.

    The added benefit is that there is much less risk in owning aapl since the hare price is not a reflection of analysts hopes and dreams but is instead a real value based on realized revenue and realized profits.

    This is all a good thing.

    • JamesW

      Fully agree.

  • Joe Allen

    Alas, take away Steve Jobs, which at least seems very possible, and how confident can we be that an iPhone successor will still be on top in 5 years? The motorola razor was slick and cool and expensive and popular, until it wasn't. Apple is at the top of a VERY competitive market…there is simply no guarantee they can stay there, especially if they lose the truly rare genius of the man who brought them back from the dead.

    Even if they sold 50% more iPhones, an incredible number, but had to cut the price by a third to meet competition, and cut profit margin in half, they suddenly become a poor value.

    • unhinged

      Predicting five years into the future is never an accurate activity. Twelve months down the track can be forecast reasonably accurately based on recent history, but this blog is built on the idea that a new competitor can appear from "nowhere" and completely ruin medium- and long-term forecasts.

      HOWEVER

      While there is no guarantee that Apple can stay at the top of this very competitive market, I think we can be very confident that they will actually manage to do just that. The past five years have shown that Apple has a long-term strategy that resonates very strongly with customers, a strategy much like that of Microsoft: make sure that everything you sell integrates. The difference is that Apple makes the integration easy and secure (Microsoft worked hard on these aspects, but as an afterthought and with mixed results) and is now reaping the benefits of good execution.

      For me, I think this will keep Apple in a very strong position for the next ten years, even accounting for the increased rate of adoption of new technologies that is pervading the market now. Recall that Steve Jobs was ousted in the late 80s and Apple still survived until the mid-90s.

    • asymco

      Are you suggesting that Wall Street is pricing five years ahead? That would be a first.

      • Coward_the_Anonymous

        I see many different explanations for the phenomenon in comments.
        I think the biggest impact comes from fact that Apple does not hold settled monopoly (or settled high market share position) in any of the markets (beside falling iPod market and PE valuation was much "better" then).

  • Cadillac88

    Someone mentioned vertigo and that’s very likely the most of it. That and Apple could still do something really foolish with all that cash. And Google could release a free OS as good as OSX. Android may one day be as good as iOS. We all seen the exponential iPod growth curve flatten out then inflect. Apple can’t possibly overcome those odds (not my view, I’m just saying what the average Joe must be thinking).
    And then there is Microsoft. Apple took on the biggest, baddest, most powerful company on earth and seems to have come out on top. David vs Goliath. David had god on his side. What kind of Magic did Apple have? Can it last?
    Logically, Apple can’t be infallible. Logically, Apple must have some frailty. Right?
    Most people today are where you or I might be if Apple ever hit a trillion dollar market cap;. Can it still grow even a little after that? You know, boogiemen and people talking? Perception is reality? In fact, most are still stuck in the the few months leading up to Apple surpassing Microsoft on the stock market. They’re stuck there; big fund managers and the like. 
    Back on earth, has anyone noticed how all that cash Apple is hoarding seems to be dragging it down? The stock price gets less than no benefit.  Even Microsoft started hoarding cash a while back, they don’t know why any better than we do. They are only doing it because Apple is doing it. Apple has more that a few shoes it needs to drop. Once that happens we’ll be good to go again. 

  • dan

    horace- the reason the PE is low is because the current published estimates for next year are extremely low. i think at this point in it's size, AAPL PE must primarily be considered on a forward basis, because the market is clearly going to forever question AAPL's growth ability and ignore the present. knowing this, why is the 2012 est. so low? i think the answer is simply found in deagol's analyst scorecard post. i dont hear the analysts themselves citing reasons for low forward est – the media generates your aformentioned worries (SJ, japan, android) as a response to published lowball estimates. maybe try to talk to a pro analyst and see what forces are at work?

    • asymco

      Bias is usually showing growth of 50% to 65% in the face of 75% to 90% probable growth. However that bias still implies a forward P/E of 10 to 12, below S&P 500 average.

      Bias alone does not explain the phenomenon.

  • Igor Stavnitser

    I don't buy Android hypothesis. The real culprit that I see is Apple's treatment of cash. W-out some sort of tangible payback (divident), stocks are just pieces of paper. It might be difficult for Apple to open new product lines that will have the margins of it's current lineup. This makes acquisitions difficult. Apple should start paying divident. Apple should split it's stock, this would increase potential shareholders pool by including 'idiots' that don't like buying expensive shares. Every earnings announcement I am hopeful that they will institute a divident, but no such luck.

    • asymco

      Let's assume a stock is priced at $10 of which $4 is cash but it increases cash by $1/yr. If management decides to pay our $1/yr in dividends, would you pay $20 for it?

      (Remember before you answer that you also will need to pay tax on that dividend, after the company already paid tax on its earnings).

      • Stavco

        It is difficult to imagine any sort of acquisition that requires more cash than apple has already (they could probably get a loan for anything beyond 60B). If Apple is not paying dividends what would have to change for Apple to start paying dividends in the future? All that cash built into the stock is not accessible to regular small potatoes shareholders like me and you. Who knows what is on Apple's mind. Anything is possible: massive dilution with employee grants, an acquisition that backfires in some big way, etc…

        As long as nothing is returned to shareholders there is room for suspicion. Also there is little reason not to split the stock in some major ways. Why not include people that don't like to own "expensive" stocks in potential shareholders pool?

      • addicted

        I don't understand the love affair for dividends. I understand that its a guaranteed payout, but its a net loss for both the company and the investor.

        All things equal, I would invest in a company that does not hand out dividends, over company that does, because the latter is simply gifting money to the government.

  • dan

    I guess what I mean to say is that the market is currently valuing AAPL fairly on a forward basis for a company that will slow from ~95% (actual trailing) to ~15% (analysts' forward estimates). thats the root of the problem, and it will eventually adjust upward when the consensus raises their estimates. but to an outsider, I think thats a fair PE for a company that will catastrophically "shrink" like the estimates claim it will. the estimates will drive PE growth, not newsflow as much.

  • Bhupinder Chawla

    How can you call the day-traders who play with the sticks and the 4.0 GPAs who are lazy bones to do nothing but create special purpose vehicles for their benefits (more riskier than the other) as investors. This is nothing but legalized gambling and we ban Internet poker! Get these 4.0 smart asses to stay invested in a company for a minimum of 3 years (you cannot stay invested for few moments and moan about no getting your return as it takes time to implement strategies) or send them to manufacturing to design great products like Apple rather than be the parasites of the world! Similarly the commodity and future traders have to own the commodity or shares ther are trading in for a while and have provided a value add to trade again! Then you will have REAL valuation.

    Wow Apple and it's great team – keep on going – love you what you do.

    Disclaimer – Do not own any shares in any technology company!

  • chandra2

    Inevitable Terminal Velocity

    The P/E contraction is indeed a reflection of the mass psychology of "saturation fear" but it is not completely unfounded. The market can not predict about future unannounced products. The current focus is only on iPhone, iPad and Mac. but it does try to discount a few years into the future. Years beyond that bring in only diminishing present value, anyway.

    1. The P/E is about growth. The P/E of a slow or low growing company is around 12. This is sort of a terminal P/E for a once high flying growth companies. ( MSFT, Walmarts of the world ). Community banks used to trade around a P/E of 10 or 12 now it is the turn of burnt out tech companies. It is like the "neutron star" of cosmology.

    2. There is really not much credit for what a company has sold in the past few quarters. It is unfair but that is how valuation is.

    3. In fact, the better your past performance, the degree of difficulty gets higher and higher.. the DOD is in maintaining the growth rate to justify the P./E

    4. One way to think about Apple is: Don't fret over future unannounced products like iTV etc. Just focus on the peak revenues for iPhone, iPad and Mac. Remember, peak does not mean end of sales, just the peak rate. How about 150 Million a year, (pulling it out of thin air)? That is a mind boggling number because if you keep up at this peak rate, even if you own 1/3 of the market of smart phones, there is not much room to grow after a while. It is only replacement sales at that point. ( yikes like PC now and how it is reflected in MSFT P/E). For Mac, how about 50 Million a year. For iPad, how about 100 million a year.?

    5. Now, when these peak rates are achieved, it would not be at today torrid growth rate, it will be much lower but it does not matter for this calculation.

    6. If you do not like my numbers above, pick the peak numbers that you are comfortable with. Calculate the revenues based on ASP estimates and calculate Eearnings based on some rough figures like 22% of revenues. Let us call it E.

    7. When this is reached, P/E will be 12 ( don't ex-cash it, that is a different story ).

    8. Peak price is 12 * E

    9. If this all feels a bit squamish, keep in mind that this is more to model the psychological expectations of growth after a certain size with the current set of products. In a way this models market psychology that exists today. Of course, Apple will be working hard at bringing in new products to substitue for the ones that are lagging in growth. But the market discounts them very heavily. Because, people intrinsically believe that it will be improbabe to come up with the product that can bring in the substitutable amount of revenues of a slowing product. iPhone and iPad for iPod is really a magical thing and that is why Apple stock is where it is today.

    10. I do not want estimate what the value of E in step 6 is. What are your estimates on that?
    It is easy to tabulate it ;)

    R=227Billion, E=50, P=600
    R=300Billion, E=66, P=792

    Now, if you can fathom a high growth company with a revenue of $300 Billion a year, you can complain then that the Apple's P/E is too low at 12 ;) but it will be the right one given how the DOD of growing significantly on top of that 300 Billion.

    11) Now, Let us say it reaches these peak rates in 6 years. For $227 billion, it represents a 12% growth. So, all we can conservatively expect is Apple stock to meander its way to 600-800 in the next 5 to 6 years. That will indeed be awesome but to do that Apple has to execute everything right to reach an annual revenue figure of 227 to 300 Billion.

    12) At this point Apple would have accumulated so much cash that way to maintain earning growth may not be through product sales but through shrewd financial engineering… like buying companies with higher growth than its own etc.. The word 'accretive' in 9 months will be thrown around. Yikes…I would not want wish it on Steve Jobs to be around Apple to see that. ;)

    OR

    Break up the company to unleash value.. another financial engineering manuever.. Now we are far removed from Apple the great innovator of products to Apple struggling to enhance share holder value.

    I may sound fatalistic here, but there indeed is a certain kind of inevitable fatalism in the evolution of companies. Not too many companies are incredibly successful like Apple to even dream to test out these Inevitable Terminal Velocity. This is like the 1000th level in a very tough game where no one has gone to before.

    • KSMC

      You can't see the wood for the trees. Jobs is an intellectual and emotional genius and he's recruited a like-minded team who will carry on in the same vein when he's gone. And Tim Cook is a forensic genius on the numbers/supply side.

      You can't measure it, you can only feel it. It takes genius to see genius. And for those who worry about how much growth is left for a company like Apple, think of how many Apple products will be sold in China twenty years from now. I'm reminded of Buffett buying into Coca Cola in the seventies and how hard it was to see back then where growth was going to come from…and Coca Cola didn't have an exploding China or India to expand into (less so in the case of India perhaps).

  • iphoned

    Unfortunately Bryn and Page control 60% of the voting stock, and Schmidt another 9%. It is the old "Newspaper company" dual-voting-stock ownership structure. So Google is hostile-takeover proof at any stock price.

  • KenC

    Looking for a reason in an irrational market leads to frustration.

  • gprovida

    My take is that Stockmarket sees Apple not as an IT company, but rather as a Media company [think PIXAR] and as such it believes the success for Apple is continuing mega-hits not more routine business trends, e.g., Sony, Dell, even Google. So it does not really look at Apple's business fundamentals as an IT or CE company and as such it has a wow mega hit up goes the stock, then it tails off waiting for the next mega hit. While I am not a fan of most analysts and certainly take Gartner et al with a very very big grain of salt, I think there are more "objective" as a business view. Bloggers and stock market are less attentive to fundamentals in Apple case. I wonder if the value fluxuations of media companies, especially movies, have a more similar stock behavior. Sort of New Line Tolkien boom post Tolkien bust.

  • alex

    chandra2 makes a lot of sense to me.

    From product innovation perspective, how about this:
    The bulk of investors lack the imagination to trust in Apple's "magic" to repeat itself beyond the current product line-up. Apple focuses on creating one "perfect" product where competitors create dozens or models in hundreds of variants.
    Most people don't understand and fully trust this product creation model and hence see it as a huge risk – "everybody will once make a poor product and then Apple is doomed".
    So the iPhone 4 antenna issue causes strong reaction because that's the only up-to-date phone Apple has got. Investors are scared of a really significant flaw in a new product – either new category or next-gen like iPhone 5. So their easiest "solution" is to discount heavily future products and rely on the "facts", e.g. glass ceiling due to niche/luxury character.

  • neutrino23

    My take is that the stock is low partly because no one is championing the stock in a major way. That is, Apple doesn't seem to really care much about the stock price so they leave it up to the investors. With the amount of cash they have they can finance anything they want so they don't need to go to the market for cash.

    Look at Amazon. They are a retailer. They could lose their business any day as people decide to shop elsewhere. There is no value or cash to back up the share price yet they have a sky high P/E around 60. That's because people are out pushing this stock with stories of future growth. You hear these stories about how the Kindle will sell vast numbers and Amazon will control all sales of electronic books and how Amazon will release a tablet and take away the iPad market. These are all pretty silly stories. My point is that people are out there pitching these stories and more with the effect that the stock price is pushed up. I have a great story of a friend's relative who is a stock broker. He was going on and on with my friend about how Cisco Systems was a great stock ( a few years back). Then he asked my friend, "You live in Silicon Valley, what sort of business is Cisco Systems in?" Another example of the herd being led by a story.

    No one (to my knowledge) is promoting Apple in this way. Apple is closed mouth about future products or even the direction of future products. They leave this up to others.

    I'll also agree with many others that a strong component of this is the fact that many people just don't understand Apple's products. You've all seen the comments on many boards. Apple makes pricey colored plastic toys, they make luxury goods, the iPad (iPhone, iOs, iPod, MacBook Air) is a temporary fad, their products are overpriced, Windows is just as good as MacOS but cheaper. Since they don't understand the product and the business they look at the high sales/growth and it must look like they are held up by Helium. Apple must be like Beanie Baby Dolls or Cabbage Patch Dolls. Any day now people will move on to some other fad. This ties in with the lack of a champion. Without a solid story being pitched this sort of stuff fills the void.

    Also, Apple get more than half their revenue from overseas which further obscures their business to US investors. This is great as it helps insulate against the fall of the dollar.

    I am totally fascinated to see what Apple does next. You see hints with Airplay, Thunderbolt, iPads, the NC data center. I can't wait.

  • addicted

    Good point.

    Just like there is no "tablet" market currently, just an iPad market, there is no "productivity" market
    either, just an Office market. Apple needs to convince MS to develop office for the iPad.

    The moment they do that, their stock price will rise dramatically.

    • asymco

      Let's be clear about the gap that needs to be filled: it's bigger than the entire market cap of Microsoft. I doubt that the $300 billion missing from current shareholders is due to the absence of Office for iPad.

      • addicted

        Wow Horace, you have a great way to put things in perspective! No wonder your blog is a must visit every day.

        That is just a stunning comparison.

        I still hold that a large part of what is holding AAPL back is psychological (e.g., the iPad is not a computer), but it obviously does not explain the whole gap.

  • Alan

    Apple would do well to go private. Remove the distraction and restrictions of being publicly held and control their own destiny. They have $60B on hand, and I would think could finance another $250B based on their earnings. If they are going to produce another $30B this year it is almost a no brainer.

  • asymco

    Apple has been growing earnings at rates far higher (93% last Q) than any other blue chips. It's been growing at a multiple of the market for years. Its P/E has been a fraction of the market.

    The market's undervaluation of Apple is far greater than a discount for the cash. As the post implies, $300 billion is missing from Apple's valuation.

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

      $300b is missing from "your" valuation.

  • Dan

    Highly visible legal crap without any obvious resolutions. Apple is suing the other guys and the other guys are suing Apple. But, the other guys aren't suing each other. Could Apple suddenly be faced with very large payments due?

    I believe the high bid for Nortel's patents is about $1b. I think Apple should jump in hard and go as high as it takes.

  • http://www.expressanalytics.net Hemant Warudkar

    AAPL's P/E is driven by a number of issues identified by the learned community of Asymco readers. However I believe it is the challenge of grasping the value proposition of Apple Inc. The market place in general has a challenge that Astro-physicists encounter when imagining the size of the universe and the possibility that there could be multiple universes like ours.
    The rate of growth of AAPL needs a different scale of measurement.

    I believe we are in an era of Trillion dollar market caps already, AAPL may be the first to get there. Most of the astute investors seem to have grasped it and have quietly started to hoard AAPL shares on every dip. The
    future is already here it is just not evenly distributed. Once the market grasps these realities the AAPL P/E may reflect reality. Case in Point–Steven Cohen of SAC capital added 171.25% at an average selling price of $311.

    It is hard for the market place to imagine that AAPL
    1. could sell 500 million iPhones in a year, since no one has done it before,
    2. could create three more products like iPod, iPhone and iPad in the next decade
    3. could manage to keep their margins at these levels another two years
    4. could maintain the quality of their products for the next decade
    5. could find a visionary CEO for a post SJ era

    It is hard for the market to imagine that
    1. the emerging economies of China and India can absorb AAPL products faster than apple can produce
    2. that there is a pent up demand for internet connectivity in the emerging markets
    3. that while the growth of the PC in the emerging markets was limited by sharing the phone is an intensely personal thing
    4. that the iPad removes the fear of computers by eliminating the keyboard and the millions who don't know typing will adopt it with alacrity
    5. that the growth is limited by the supply and not by demand of the AAPL products

    I am glad though to note that SJ and the rest of apple management understands this and also realizes that market valuation is a fickle thing. At one time CSCO was valued at $600B.

  • chandra2

    Good and valid points Hemant.. ( except for the csco valuation during the bubble.. we do not want that kind of froth for Apple. A lot of people will get hurt )..

    The interesting thing about growth is that Apple has to meet the previous year's sales and earnings plus the added sales to satisfy the growth. That is an obvious statement of course but just to see how mind boggling it gets, here is a sample evolution of future course of events… We start with an earning of 1 dollar. The second column is the growth rate for the succeeding years and the third column is the earnings required to meet that growth. In this simulation, after 10 years, the growth comes down to a reasonable 20% but the earnings required is around 30 times today's earnings.

    With around $20 now, the market has to believe that Apple will earn $600 in earnings in 10 years. Not just that, look at the further implications. The yearly sales will have to be around $2.75 to $3 trillion a year and the stock price to get to $6000 for a meagre P/E of 10. I do not think the market can fathom how such a future state will be achieved.

    Another way of stating this is, those who hold the view that Apple price has to be higher along with a higher P/E (basing it on current growth rates) has to really make a case for this kind of a future evolution for Sales and Earnings for Apple.

    Yet another way of stating it is, the low P/E is good. It will at least allow for the apple stock to appreciate slowly over time, contracting the P/E. What this does is it allows for newer share holders to not be afraid to buy Apple. If the P/E is higher than where it is now, the stock is much more risky and volatile.

    So instead of considering that the rest of the world does not understand Apple ( that is really not the case any more, to the extent anyone can understand a company ), treat is as most of us ( and hence the market ) not being to fathom how the future earnings of 30 times current earnings can be achieved.

    More importantly, if you are a long term investor in Apple, accept the low P/E as a really good thing and have patience for the stock to inch up ever so slowly. Let the P/E contract further. That will only provide more stability for the stock and confidence in the stock.

    Yr–Grth–Earnings
    Start with $1 of earnings
    1–70–1.7
    2–65–2.805
    3–60–4.488
    4–65–7.4052
    5–38–10.219176
    6–30–13.2849288
    7–28–17.00470886
    8–24–21.08583899
    9–20–25.30300679
    10–20–30.36360815
    11–16–35.22178545
    12–15–40.50505327
    13–18–47.79596286
    14–10–52.57555914
    15–12–58.88462624
    16–5–61.82885755
    17–10–68.01174331
    18–5–71.41233047
    19–10–78.55356352
    20–5–82.4812417
    21–12–92.3789907
    22–6–97.92173014
    23–10–107.7139032
    24–12–120.6395715