The Apple Growth Scorecard

Apple’s revenue for the first quarter was $24.7 billion, which at 83% was the largest quarterly revenue growth they ever experienced. Operating margin was an all-time high of almost $7.9 billion, representing 31.9% of revenue and yielding 95% EPS growth.

After earnings were announced the share price reached $350.7. This includes $70 in cash. Trailing twelve months’ earnings were $20.97. That makes the Price/Earnings ratio 16.7. Excluding cash, P/E is 13.4. The average growth over the past four quarters was 77%.

The following chart shows the share price vs. earnings. The green line is price and the blue line is share price. I also added multiples of the earnings to show how the stock traded in certain multiple bands.

During the period of 2006 to 2008 the company shares traded roughly in a range of 35 to 45 P/E. Since late 2008 the company shares have traded in a range of 15 to 25 P/E.

Share prices normally reflect potential earnings growth and past growth is often a good indicator of near term continuing growth. This is why the P/E is usually a proxy for growth. The faster the growth, the higher the P/E. Or so one would think.

If we look at the P/E vs. earnings growth for Apple, the picture is not encouraging.

P/E and Growth don’t seem at all correlated. In fact, if we drop two outliers it almost seems that P/E is insensitive to growth.

I took the data a step further and separated it into two clusters: pre-recession and post-recession.

The blue circles are Q1 ’07 to Q2 ’08 and the orange plus signs are Q3 ’08 to Q1 ’11. As the share price chart implies, there is a clustering of averages where during the 2007 and early 2008 period P/Es were in the 35 range while growth was in the 50s and P/Es below 20s with similar or higher growth ranges.

As the following scorecard shows, the company’s growth is exceptional. That does not seem to be something that is being valued by investors.


  • Do you think there's any chance that an analyst will ask Apple about this in an earnings call next quarter?

    What do you think is the main cause of this pessimism?

    Are analysts thinking that Apple is going to marginalised by Android?

    • kwyjibo

      It's not the analysts that should be asking Apple. It would be Apple asking the analysts what their fucking problem is – because AAPL should easily be trading in the $400s.

      • Nicu

        Most analysts have targets over $400. It's not their fault that the market is a very complex system that cannot be easily predicted – if it would be so easy, huge earnings always followed by a huge run up, we could all retire after three earnings reports.

        Want some reasons ? Nasdaq rebalancing ? Large portfolios adjustments (recent growth, Nasdaq etc.) ? Flashbacks from 2000 (when tech valuations were more than $500B) ? There are others, some of them that will remain unknown …

      • Steve

        Well, right now, I could believe the stock price is depressed by institutional selling associated with NASDAQ index funds being rebalanced.

        But, long term, I've just got to believe that the piper will have to be paid. The longer this suppression continues, the behinder the P/E will get. And I'm long in AAPL, so that piper is me. Dammit.

      • Steve

        And some is probably still Job's health…

  • philE

    You seem to be ignoring relative valuation. MSFT is trading at a low PE, as is RIM, and many other majors. This seems to be an industry phenomenon at the moment… might be helpful to plot the current PE of AAPL's industry peers.

    • asymco

      I do look at comparable companies and at indexes. (For example Apple's P/E is lower than the S&P 500. Amazon has a P/E of over 70 and it just reported a drop in earnings.) Microsoft and RIM are lower but no matter who you look at, growth of 95% is unmatched.

      Note the scale of the x-axis in the scatter plots. Imagine where most companies (MSFT and RIM included) would fit.

      • philE

        Horace, thank you for your thoughtful reply. I should be clear I agree with your thesis.
        Just a quick follow-up.
        Would you agree that the tech industry is currently in a historically low PE period. This is the main driver of my comment and may partially explain a portion of the AAPL PE mystery. For instance, rail transportation (another sector I follow) currently has a higher average industry PE than tech.

      • asymco

        Tech does have a historically low P/E. But they deserve it. As we enter the post-PC era there will be huge evaporation of profits out of the tech incumbents. Those profits will condense around new entrants (and Apple.)

    • Hamranhansenhansen

      Microsoft is not growing and still makes the vast majority of their money from two 1980's products, Microsoft Office (1984), and Microsoft Windows (1985), and lost almost their entire high-end PC business to Apple since 2006, and since 2007, had their phone business obsoleted by Apple, and then taken by Google. RIM had their main business of secure email called into question when they were shown to be a single point of failure where governments such as India can tap all BlackBerry users, and has failed to ship a successful modern smartphone. These are not Apple's peers as far as success.

    • gslusher

      Apple's (NOT "AAPL's) "industry peers"? WHICH industry?
      – OS? Microsoft, Linux?
      – PC? Dell, HP, Acer, Lenovo, etc?
      – Smartphones? HTC, RIM, Nokia, Samsung, etc?
      – Mobile OS? Microsoft, Google, Nokia, RIM?
      – Tablets? Samsung, MMI, RIM, Dell, Viewsonic, Coby? (Actually, calling any of them Apple's "peer" would be a real stretch.)
      – MP3 players? SanDisk?
      – TV devices? Roku, TiVo?
      – Smartphone-without-the-phone-part? No one.
      – Music downloads? Amazon, Wal-Mart, etc?
      – Streaming movies & television shows? Netflix, Amazon, Hulu?
      – ebooks? Amazon, Barnes & Noble, Sony?

      So, which is it? The truth is that there is NO company that is really Apple's "peer."

      Some of those have low P/E, some VERY high (e.g., Amazon).

  • Hamourabi

    All your data show that investors expectations for future (next 5 years ) growth got much lower since Q3 2008.
    But I fail to understand why such a radical, sudden and permanent change. Size, Jobs worries etc.. are not good enough explanations ; there was also a lot of big worries pre Q3 2008.

    • Iosweeky

      What about the theory that there aren't enough buyers? Everyone that is informed enough has already gone all in on AAPL and is simply waiting for the payoff. If apple started paying a dividend maybe it would attract a huge group of buyers from the income focused funds and people and can also reinvest their dividends in more Aapl stock.

      I'm not saying I agree with the above – but it's interesting to contemplate.

      • KGB

        I am not a dividend proponent but I agree with your opening sentence. The bottom line is that there are insufficient buyers. Bear sentiment has been strong regarding AAPL for the past several quarters. For all the back-clapping that occurs with 'amateurs' vs 'professional' analysts, the negatively creeping P/E continues, quite independent of earnings, growth estimates/projections. As Asymco has stated in an earlier post, the AAPL P/E provides an interesting research study.

    • Walt French

      Eventually I think yours is the only logically consistent answer. The market is discounting the extent to which Apple can continue these meteoric earnings increases.

      And if you wanted to make a “bear case” — actually, a merely ordinary bull case — for Apple, you don't have to use much imagination: Apple already has a dominant share of high-margin PCs; if they grow share while keeping margins fat, they will be significantly re-inventing a 20-year-old market. Ditto, there is a huge mindset that Apple has already taken the high-margin smartphone business and future growth is with the ZTEs and Huaweis (sp?) and HTC, and not with Motorola, even Nokia and certainly not Apple. Ditto, the notion that the iPad is merely a low-price-point PC suggests a limit for it.

      None of these stories pay any respect for what I take to be Apple's real business: technological disruption leading to a couple years of having a market all to itself, and then settling down into a nice leading share (whether 90% of iPodTouuch/tablets, 90% of music players, 40% of smartphones or whatever) with margins reflective of both its having defined the market to its terms and its first entrant status. But these stories require us to think of Apple as an exceptional company. Acer can say they will become #3 tablet/small computer maker and the market ignores the bravado; they are similarly saying that at the end of the day, Apple is just another company and is likely to get locked into the same ole same ole as they do today, the fire in the belly extinguished.

      And with it, future customer-enchanting products, and high-margin, high-growth driven EPS, also extinguished.

      At some point there will be enough ex-Apple employees and aggressive innovators such as Amazon, to get to ultra-growth opportunities before Apple. I, and apparently most here, think that day is too far in the future to matter. But that day will come. Apple cannot take over the entire US economy.

  • timnash

    As the iPhone5 product transition won't happen this quarter, Apple has a chance of beating last quarter's revenue growth. If iPhone4 sales can hold at a similar level to last quarter, then with the ramp up of iPad sales and the ever increasing Mac sales, Apple should do it.

    • Hamranhansenhansen

      This quarter will have white iPhones, Sandy Bridge MacBook Pros and iMacs, a whole quarter of iPad 2, and WWDC, which could have Sandy Bridge MacBook Airs and Mac Pros.

      • Iosweeky

        Dont forget the iPhone air and / or apple HDTV on the near horizon….

      • KGB

        I concur, empirically; however, we have had 2 sequential quarters in which iPad numbers have 'inexplicably' been lower than anticipated. There does seem to be some problem in ramping up production of iPads and to some extent, iPhones (Apple would appear to have more demand than supply in both hardwares, and suggests that something needs to be addressed re production lines).

      • asymco

        Were these anticipations for the iPad perhaps from the same people who also anticipated as follows:

  • Nangka

    Any notable events happened around the late 2008 time when Apple's share price took a dive that might provide some clues to this abnormality? Perhaps the mindset change that resulted would explain the lower band of Apple P/E ratios since then.

    • Hamranhansenhansen

      Worldwide financial meltdown.

      • Nangka

        Ok. The next question would be did this meltdown change the mindset change of all investors with regards to whole market, industry, sector, or did this only happen to Apple?

        Do we see similar PE ratios band shifts in other similar companies too?

        And Apple actually rode out the meltdown much better than the market with quarterly growths. Is that why investors don't "trust" Apple anymore? Or simply they are staying on the sideline because they can't understand why Apple was immune to the market conditions?

      • gslusher

        Let's put it this way: the prices of stocks fell dramatically, but their earnings didn't change much, so the P/E would have to go down. From Aug 18, 2008 to Nov 17, 2008 (well, the "week of" in each case), the DJI dropped 31%, the S&P 38%, NASDQ 43%. AAPL dropped 53%, RIMM 66%, DELL 63%, HPQ 26%, GOOG 46%. (MSFT actually went UP over 3%.) So, yes, there were shifts in the P/Es of other companies, as well.

        Since 11/17/08, as of yesterday (4/27/11), the DJI was up 58%, the S&P 69%, NASDAQ 107%. RIMM is up 24%, DELL 69%, HPQ 18%, GOOG 105%–and MSFT is DOWN 8%. Oh, AAPL? It's up 324%–three times the next-best on that list (GOOG–don't count NASDAQ, as that included AAPL).

  • I can smell different reasons chaining apple in the current market evaluation.

    1) Steve Jobs is the father of apple fortune, what about an apple without SJ, will it make the same decline has happened when SJ was put aside in the 80s?
    2) Apple is like a newco since it's rebooted in 1997 when SJ returned in apple and started to grow only 12 years ago, will it be able to innovate in the future?
    3) Apple success is in focus, good, but the success relays on a very small number of products. Say for instance that apple goes wrong with the next iphone, a big mistake, well half of the entire revenue could be gone
    4) Apple will be able to compete with low margins?
    and so on.

    I personally don't think that those are sufficent reasons for current market situation, but perhaps other people do.

    • Hamranhansenhansen

      Number 1 is a good reason to hoard cash to get Apple through the time after Mr. Jobs retires. Number 3 is a good reason to diversify their phone lineup.

    • unhinged

      So… if Apple makes a mistake people won't be able to predict it and sell the stock? That's the reason for Apple's share price not growing?

      It sounds like a lot of FUD to me – Fear, Uncertainty and Doubt.

      I just cannot think of another company where an 80%+ growth rate for more than 12 months would not have the share price going through the roof.

      Maybe it's thinking along the lines of "Oh, Apple doesn't sell to business, therefore they aren't going to maintain their sales and aren't going to be good at business themselves. I hear they don't even own suits!"

      • arthur lecuyer

        "Oh, Apple doesn't sell to business, therefore they aren't going to maintain their sales and aren't going to be good at business themselves. I hear they don't even own suits!"

        Great post and absolutely correct. Apple has beat the street consensus by over $1.00 per share in the last 2 consecutive quarters.
        If beating by a nickel is good, a dime great, a quarter outstanding and fifty cents is incredible, what exactly is a $1.00+ beat worth? Apparently not much!
        But, but, but they don't sell to business (LOL).
        As gslusher posted there is no direct competitor to Apple. That's why the market manipulators ( err I mean hedge funds ) are beating Apple down.

    • gslusher

      "Apple success is in focus, good, but the success relays on a very small number of products."

      Hardly. Compared to Dell, RIM, Nokia, MMI, Apple is extremely diversified. (Samsung is an entirely different matter, as it is a conglomerate.) In the last year, Apple got these percentages of its revenue from various lines:
      Macs: 22.5%
      iPod: 9.2%
      Music: 6.3%
      iPhone: 42.2%
      iPad: 14.2%
      Other: 5.5%

      Take away the iPhone and Apple's revenue for the year was $50.5B. That's still a huge company. Leaving out the iPhone, AAPL's revenue for the last quarter increased by nearly 54% year-over-year, in part due to the iPad.

  • Sander van der Wal

    I know that markets can be irrational longer than you are liquid, but why isn't everybody who believes Horace is right buying Apple shares by the truckload? By the time the market gets to its senses you'll be a lot richer.

  • T. Friesen

    Is there any truth behind the thought that AAPL is already held by such a large number of funds and individuals, that the larger funds market — which should, by necessity, be balanced — for the shares is saturated? Could this explain some of the otherwise irrational pricing of the stock over the past three years?

  • tom b

    The market gives AAPL no respect; they put it in the same "value instead of growth" box as INTC and MSFT. AMZN is a great company, but it IN NO WAY is worth a 73 P/E when AAPL is less than 20. Sme with VMWare , at >100 P/E/

    • Hap

      "The market gives AAPL no respect…"

      I've owned this stock for many years. In a sense, I'm happily 'committed.' But it seems to me that the traders may be having so much fun 'doing' it that the familiar nasty aphorism comes to mind: "If the milk's free, why buy the cow?"

      The triple-digit stock price would slow me down were I thinking of investing more. 100 shares would cost me $35,000. For most individual investors that's a lot. But I'm not recommending a split for marketing purposes. After all, look at Berkshire Hathaway.

      • davel

        Yes, look at Berkshire. When they did the B shares and it got added to an index the shares went up.

        It is hard to buy one stock at 100k.

  • russell

    The market usually undervalues the key players because of not understanding positioning/valuations at certain points early in disruptive tech cycles when things are unclear. However, in these situations the multiples often seem too high at the moment when if fact they are too low for a tech company that is a category killer or monopoly. Proper actions to have taken always make sense in hindsight to most investors. Do we have a fundamental breakdown of the market not understanding the technology adoption life cycle( tech study 101) as it applys to Apple and perhaps others that are undervalued at this time?

    I'm with Horace here though in regards to specifically Apple at this moment in time, we have such a vivid picture of a company that is clearly well positioned and a history of earnings to thoroughly back up the story. It should be undervalued even with a somewhat lofty multiple applied to it. Eric Jackson at just wrote an article( he quotes Horace, too) that lists a number of events that could jumpstart the price for Apple again. Perhaps the catalyst to $550 will be event driven and not earnings driven.

  • just looking at some data over at GOOG finance. it looks like apple results are flattening out on a sequential basis over the last couple of quarters. and then there is this: Looks like Android is making it's impact.
    Apple Inc. Issues Q3 2011 Guidance; EPS Guidance Below Analysts' Estimates
    Wednesday, 20 Apr 2011 04:30pm EDT
    Apple Inc. announced that for the third quarter of 2011, it expect revenue of about $23 billion and diluted earnings per share (EPS) of about $5.03. According to Reuters Estimates, analysts are expecting the Company to report revenues of $23.8 billion and EPS of $5.24 for the third quarter of 2011.

    • KenC

      Can you tell us where you are looking? I'm over at Google Finance looking at their income statement graphics. Presumably, this is what you are looking at. The problem is that you only get 5 quarters of data, which makes CQ1 look like a leveling off, when we all know if you look at Apple's quarterly earnings over several years, that the drop post-Xmas is seasonal. I'd wager that this post-Xmas drop is less than in years past.

      As for the Guidance for Q3, I'm not drawing the same conclusion you are. Where is there any indication of Apple's guidance being anything other than their normal conservative guidance, factoring in a greater mix of lower-margin iPads, etc?

      • apple guided below what analysts expected apple to guide at.

      • KenC

        Uhm, if you haven't noticed, they have done that for 30+ quarters in a row. There's nothing new here. You are reading something that isn't there. Is this another one of your "sense" moments? You "sense" that Apple is guiding conservatively because of Android? If this is the quality of your "sense"s, then just be aware that your "sense" needs major recalibration.

      • I get a sense that you may just in fact be fan boi numero uno around here. Correct?

    • Joe_Winfield_IL

      Your first statement is either empirically false or misleading and irrelevant.

      How do you define "flattening out on a sequential basis?" Do you literally mean that Jan-Mar is lower than Oct-Dec quarter? If so, file that under irrelevant. Take a look at a 10 year chart to see the pattern occur EVERY SINGLE YEAR. Apple makes consumer electronics, and – newsflash – people buy more of them before Christmas than immediately following.

      If your "flattening" comment was instead referring to a sequential y/y decline, you are making a factually inaccurate claim.

    • gslusher

      You cannot compare quarters sequentially without looking at the history. Apple's sales are seasonal. Here's the revene for the last two years and the sequential change. See a pattern? (Remember that Q1 is the holiday quarter) All values are $M

      Q1 2009: $10,167, +29%
      Q2 2009: $8,163. -20%
      Q3 2009: $8,337, +2%
      Q4 2009: $9,870, +18%

      Q1 2010: $15,683, +28%
      Q2 2010: $13,499, -14%
      Q3 2010: $15,070, +16%
      Q4 2010: $20,343, +30%

      Q1 2011: $26,741, +31%
      Q2 2011: $24,667, – 8%

      Wha happened was that Q2 2011 did not fall as much as usual–8% vs 14% and 20%, mainly because of iPhone sales. That would change the comparison of Q3 to Q2. Also, the iPad became a factor in Q3 2010, accounting for the more-than-usual gain in that quarter versus the previous quarter.

      More important, Apple always gives conservative (sort of "worst case") guidance. They usually beat their guidance by a large factor. Last year, the guidance for Q3 2010 was $13.0-13.4B. The actual figure was $15.1B, a 12.5% beat over the high end. Apply that same factor to Apple's current guidance you quoted and you get revenue of $25.9B, an increase of about 5%.

      Don't pay any attention, at all, to the "analysts" estimates now. The pros are usually way off on the low side.

    • Kristian

      "NPD: Apple iPhone 4 for Verizon best-selling mobile phone in U.S.; causes Android to lose share for first time since Q209"

  • a responsible management of a company that is over capitalized, and thinks the shares are undervalued, would do the rational thing: buy back stock. But apple doesn't do that. it also doesn't pay a dividend. It has way more cash than it could ever need. This is why investors fret about apple. they see poor capital allocation. If apple is truly undervalued then why doesn't management buy back the stock with it's excess cash?

    • davel



      Why 'use' the money to manipulate the stock? That is what a financial manipulator does. Why would a company that produces products and is focused on research, its retail customers and its production line care about this?

    • Hamranhansenhansen

      The market is also threatening to crash Apple stock if Steve Jobs retires. In that case, having a lot of cash is prudent. When he retires, there will be a time when Apple has to prove itself yet again.

  • but this post is laser focused on apple. here, it's always about how great apple is and how lousy google is. right? but instead of addressing my points, you shift the argument to an indictment of goog. very interesting tactic.

    • Hamranhansenhansen

      You are the one who brought up Google.

      Google is clearly not gaining any of Apple's high-value customers. Android's gains are coming at the expense of feature phones, not iPhone. The Android growth is all low-end, feature phone replacements. Many are free, many do not have data plans, many do not even have Google Search on them, they have Bing or Baidu. These new smartphone customers don't use the Web or apps much and so don't look at a lot of ads, and even when they do, they are not as valuable to advertisers as Apple customers. You can see this in Android's shockingly low app sales and revenues (4th behind Apple, Nokia, RIM) and surprising absence from Web server usage logs, where they are not only way behind iPhone, they were passed by iPad only a few months after its debut last year. There was also a Google advertising executive who said in an interview recently that he loves to see iPhone growth, because Google makes more money from iPhone users than Android users. That is why there is no joy in the Google financials. They gained low-profit Nokia pie, not high-profit Apple pie. There is no missing Apple growth that can be explained by Android growth.

      What we are seeing is cheap or free feature phones convert to cheap or free smartphones, driving up the overall size of the smartphone market as it eats the feature phone market. You can see handset makers literally replace a feature phone model with an Android model, causing the smartphone market to jump in growth. So Apple's position relative to smartphones looks smaller because they do not yet have a cheap smartphone. Their position also looks small relative to the entire phone market because they do not have a feature phone. That hasn't stopped them from taking and maintaining over half of all the profits in the entire industry. That hasn't stopped them from growing their phone business something like 83% year over year, and all meaty, high-value customers with industry-leading loyalty who buy apps and click ads like nobody else. And Apple has 90% of tablets and 75% of media players running their smartphone apps as well, so developer support is unparalleled. There is no way to paint anything as bad for Apple. They are dominating even though they don't yet compete at the low-end.

      There is an interesting analog to PC's. The Mac has 90% of the high-end PC market and Apple is by far the most profitable PC maker and biggest by market cap, but they traditionally had only 10% of the overall PC market because they had no low-end PC, they were never competing with the $500 PC which makes up the vast majority of the overall market. Now, however, they have a $499 PC in iPad, and for the first time we can see them becoming the biggest PC vendor by volume in the near future. iPad is the mass market, low-end Apple PC. In phones, iPhone is the Mac, high-end only, but Apple has not yet shipped the low-end phone that corresponds to the iPad in PC's. That is still to come, and it will have the same effect on Apple's phone share that iPad had on their PC share.

      So the people who are saying iPhone is the Mac and Android is Windows are right, but they are wrong when they say the current smartphone market is like the PC market of the 1990's. It is not. It's like the PC market of 2009, right before the iPad. Tim Cook already said a low-end Apple phone is coming. You can also see an analog with HP buying Palm and Nokia signing up with Microsoft: the highest-volume PC maker and highest-volume phone maker, yet in spite of that, both making radical changes. In HP's case because of iPad versus their low-end PC business, and in Nokia's case because of the upcoming low-end iPhone versus their feature phone business. They both already lost the high-end of their businesses to Apple. Apple coming for the low-end made them take drastic moves. These moves are entirely separate from Mac and iPhone. They are about the low-end: TouchPad low-end PC's, and Windows Phone low-end smartphones, versus iPad and an upcoming low-end iPhone.

      You can also look at the iPod before it diversified in 2004. Analysts said OK, Apple has the high-end, but they always ship only high-end, everyone else is safe shipping $200 media players. Then Apple did iPod mini/nano at $200 and took over 75% market share. iPad is the "Mac nano," and we are waiting on "iPhone nano." Pretending it is the 1990's and Apple has just self-destructed over 10 years after firing Steve Jobs and parading a succession of loser CEO's out one after the other while letting their technology stagnate and milking only the high-end is a kind of denial. It is indeed the 21st century and Apple has just done the entirely opposite 10 years. They have low-end media players and even a low-end PC … they are coming for low-end phones. Free-with-contract, $50/month Apple phones are going to radically change the market, same as iPad is changing PC's.

    • KenC

      Where did Horace's post make any reference to Android, or are you referring to Tom B's post? You raised the issue of Android, right?

      The problem here is that you didn't make any points that were clear enough to discuss. They were incredibly vague. Very interesting tactic.

      • I never raised the issue of android. it was raised as a diversionary tactic. it was quite effective.

      • ______

        Sorry son,
        "just looking at some data over at GOOG finance. it looks like apple results are flattening out on a sequential basis over the last couple of quarters. and then there is this: Looks like Android is making it's impact. "

        Those are your words and you brought up Android.

        As for sequential QoQ, no one is going to respond to you because those are irrelevant, can fluctuate and depend on seasonalities. YoY EPS and revenue growth are important and tracked. Go do some research, bring up cogent arguments and people will engage.

        This trying to start a fight behavior will get you nowhere, even if it did get you to a CEO title

      • you are correct. I forgot. I did slip that comment in. I apologize to each and every one of you.

      • KenC

        Are you bi-polar? What gives? Didn't you do this sort of thing once before? Say things, disavow you said them, then say you did it for the fun of it? Isn't that the definition of trolling?

      • your high school debating principles are lost on me. I submit that the first person to make things personal (that would be you) has lost the battle of ideas. Maybe you can try to keep it to the issues and take personal attacks out of it? or maybe you can't.

    • unhinged

      "Looks like Android is making its impact"

      Yeah, there's an argument shift going on.

      Comparing Apple's guidance (which has historically been VERY conservative over the last ten years or more) to the estimates of "professional" analysts (who have been shown by Phillip Elmer-Dewitt to be rather lacking in accuracy) is a waste of time given current circumstances.

  • berult

    As long as Apple makes a business out of systematic disruptive behavior, the market will price it accordingly. There are simply no precedents to this business model, unless one throws back to the ebullience of the Renaissance era itself.

    What the reactionary suppression by the Church did to the awakening of mankind to universal humanism, the institutional market orthodoxy does to Apple's revolutionary pretenses. The freedom to disrupt tags a price in step with the burden it lays on the institutional framework it aims to supersede; disrupt all you want, …and factor in the cost of strong arming constants and parameters into becoming a new …variable, dynamically unstable orthodoxy.

    We are not witnessing so much a major technological shift but more of surreptitious shift from institutional to individual, …cellular, …networked empowerment. Indices, ratios and familiar landmarks should be pretty well discarded and discounted as markers of ex-ante balances of power and exhaustive market maturity.

    Apple is all interregnum. For the individual, …it's a power-grabbing buy. For Institutions, …it's an ego-suppressing sell. For the rigorous analysis, …a terra incognita of migratory spellbound prejudices…

    • Steve

      "here are simply no precedents to this business model, unless one throws back to the ebullience of the "There are simply no precedents to this business model, unless one throws back to the ebullience of the Renaissance era itself. "

      God, I just LOVE that sentence!


      • Steve

        damn cut and paste…. (sigh)

  • tom b

    Agree 100%. That's why I think they are holding all that cash.

    They should buy NFLX, though, maybe……..

    • Hamranhansenhansen

      They don't need to buy Netflix. Netflix has 12 million subscribers, while iTunes has over 200 million. Netflix serves many of their customers through Silverlight, and odd devices Apple wouldn't want to support when they have hundreds of millions they can get at with HTTP streaming on Mac, Windows, iPhone, iPod, iPad. And the Netflix CEO is on the Microsoft board.

  • Senator Gronk

    Is Steve's departure really a concern?

    Can anyone point to actual short-term data in the years after Steve Jobs' departure that show the company in decline? Let's look!

    Steve Jobs Fired!
    *May 1985 – AAPL @ $2.72/Share

    Arbitrary Date 7 years later!
    *May 1992 – AAPL @ $15.50/Share (while paying a dividend)

    Seems to me, following the simple logic of saying iPhone backwards and you hear "Steve is dead", that Firing Steve Jobs is good for business.

    Mythology is powerful stuff. My Macs from the era when the company DID fall apart, 1992-1996, still boot. Still compile C. You can't even name PC hardware from that period. Windows 95 didn't fully deploy until 97. Even when Apple was at it's darkest moment it was still the sharpest company in the valley.

    *Source: Google Finance, prices are adjusted per their algorithms.

    • Tom B

      Apple products were far better than Windows even in the years between 1985 and Steve Job's return. But the gap was a much smaller, and the company was moderately rudderless. Since Job's return, we have three world-class, UNIX-based, easier-to-program-for-than-Windows-or_Android platforms (OSX, iPhone, iPad) and the competition has mostly self-destructed. MSFT has been UNABLE to modernize its flagship product, Windows; though sinking billions into Vista and Win 7– they are still patchwork. They have no phone platform worth consideration. Google has it's iPhone clones, but they make almost nothing per handset. They made the same goof MSFT and Palm did– licensing the OS. I think THIS TIME, Jobs has planned for his departure and set Apple up for long term direction and growth.

  • most of you guys thought Android would up and die as soon as iphone made it's way to Verizon. of course, that didn't happen. in fact most people believe thunderbolt is outselling Iphone4 at "big red" today.

    • Tom B

      I'd be very surprised if ALL the Android phones together are out-selling the iPhone at Verizon, but one must understand that things do not change overnight. I think most people on Verizon are sticking with what they got until they are up for a phone-refresh.

    • asymco

      Most people? Can you be more specific? Verizon announced that they activated 2.2 million iPhones in six weeks and 260k Thunderbolts in 2 weeks. That's a 2:1 "outselling" in favor of iPhone.

    • KenC

      "most of you guys" is a strawman. Please cite who comprised this "most". Remember, "most" is a majority.

      Waiting… waiting…

      And, there you go again, throwing out another vague, " in fact most people believe". This is not a "fact". A vague, "most people" is not something that can be discussed rationally. You have to be more specific.

      • it's a sense I get reading the comments here. every day I wonder if this is the "last" day of android's fragile existence.

      • KenC

        That's great and all that you "sense" these things, but throwing around these "in fact" type statements is inflammatory as they lead to nothing but discussing what you "sense".

  • I guess all that money didn't help them "secure" enough ipad parts last quarter?

    • Nobody said their systems are perfect – just better than everybody else.

    • kevin

      Who said they didn't get enough ipad parts last quarter? They are doing a product transition, ramping down one product, ramping up another. And there ramp is faster than the iPad 1 ramp. So once again, you don't know what you're talking about.

      • who said it? apple said it. you should pay more attention.

      • unhinged

        Where did they say that? Tim Cook specifically said that the Japan earthquake had no effect on their supply of parts.

        Production capacity is another matter, however that cannot be ramped up overnight and Apple have taken a very stringent approach to increasing throughput.

        I don't see how that can be described as a failure to secure parts.

  • chandra

    In the final paragraph before Chart 1, doesn't the green line represent earnings and not price?
    A zero to $10 scale on the right might be useful to the mildly myopic, like myself.

  • davel

    This is all very shocking considering through the recession Apple was one of the very few companies that did well financially and product wise.

  • JamesW

    I think fundamentally, the market is no longer treating Apple as a growth stock, but a big cap blue chip.

    I made a plot of Apple's PE vs. IBM, Microsoft, Google, Netflix, and Amazon. The result essentially separates into two buckets. In one bucket you have Apple, IBM, Microsoft, and Google, all with PEs under 20. In the other you have Amazon and Netflix, with PEs both above 60:

    Why? I think it's primarily related to market cap. Taking the same companies and plotting for market cap produces the exact same buckets but with inverted results; the small PE companies are now at the top and the large PE companies are at the bottom:

    From this I'd generally say that the market views Apple in the same way as other high-cap tech companies, regardless of its unique future earnings potential.

    • asymco

      You begin with saying that the market is no longer treating Apple as a growth stock. The company however is growing consistently and very rapidly (as shown in the bottom line in the table in the post.) These growth rates are undeniable. Surely, it must be perilous to ignore reality.

      • claimchowder

        I think he was trying to point out exactly that: that the markets are not behaving rationally when it comes to AAPL. He was just trying to point into a direction where this market's fallacy comes from.

      • JamesW

        Right. As others have pointed out, there's no precedent for a mega-cap, mega-growth stock. The market "understands" only big-cap low growth, or small/mid cap, high growth. Given only these two buckets, the market has mistakenly put Apple in the former category, hence its low PE.

        The real question is, given more historic earnings, will the market reward Apple with a higher PE? Or will the share price only increase relative to earnings at a multiple of about 15?

  • HTG

    Horace, this is all good stuff, but it is not a complete analysis.

    1 – Compare AAPL to its peer group (RIM/GOOG/MSFT et al) and see how its multiples have compared over to the peer group and currently – this provides context for how AAPL is seen vs its comparators. If AAPL is an outlier compared to the peer group then the argument that the market is calling AAPL wrong has some merit.

    2 – Forget about using P/E ratios – they are clumsy and stupid, although pervasive. It would be better for focus on multiples of enterprise value (Ent Value / EBITDA) which is focused on operating performance rather than being influenced by capital structure and the cleverness of the company's tax lawyers… Comparing Enterprise values across the peer group may also reveal some interesting things.

    3 – Look at ROIC – how much bang is AAPL giving their shareholders for their investment (buck), again a peer group comparison would be useful. The tricky thing here is tax rates as it is normal to calculate ROIC using just the headline rate in the domicile country, but I would be inclined to use a 4 period rolling average reported tax rate.

    4 – I would also look at the EVA and MVA that AAPL is adding vs the current price and work out a value from that…

    Keep up the good work – but there is far more intelligent analysis that can be done on this point.

    • Xian

      every time I hear PEs don't matter I think of the tech bubble. PEs matter. No matter how hard you may rationalize otherwise.

      Just ask and their little puppet.

      • HTG

        Yeah but, no but…. the point is that cash flow matters most of all – of the measures I discussed above P/E is the least analogous to cash flow – EBITDA is a good proxy for operating cash flow and EVA is all about cash flow…

        Your missing the point – its not about finding a valuation method to get the answer you want, its about finding the valuation method that reveals the truth… And P/E is about the most easily manipulated by managers of all of them.

      • chandra2

        Thanks HTG for the patience. Right, you never implied 'fundamentals do not matter' which is how Xian had misunderstood you. In fact you are emphatically asserting fundamentals matter and what those right fundamentals are…

        Now how do we calculate/measure the various quantities in your post: Ent Value, EBITDA, EVA, MVA and ROIC. Are these numbers for Apple available anywhere? Especially, in Horace's table of the past 12 or so quarters, can we atleast read off EBIDTA?

      • JonathanU

        These stats require a bit more digging into Apple's (and their competitors) financial statements.

        EBITDA is earnings before interest, taxation, depreciation and amortisation. Therefore take operating income/profit and add back depreciation and amortisation/impairment of goodwill.

        Enterprise value is market cap plus net debt/minus net cash, plus minorities, minus associates.

        Economic Value Added and Market Value Added are interesting calculations although are bit more complex to explain here – google them if you are interested.

        As for ROIC – it calculates the return generated on the amount of capital that is invested in a business. Again look it up if interested in learning more.

      • JonathanU

        HTG – interesting posts.

        The best measures to look at in my opinion are ones that do look at free cash flow, but primarily free cash flow to equity – as you are looking at the business from an equity investment perspective.

        From an equity investor perspective in Apple, I don't think one should even use enterprise value. With Apple's enormous cash pile, when one buys 1 share in AAPL you are essentially parking 20% of the price in T-bills. Therefore if you use EV/EBITDA or EV/FCF to Equity then you are missing the fact that you are still having to pony up an extra 20% of essentially dead money in t-bills earning less than 1%.

        As an aside, EV is used to value businesses from a takeover viewpoint. It's used in i-banking and private equity as they are interested in understanding what the takeover value of a business is. However, you and I aren't about to be taking over Apple when we next buy common shares, but merely taking a small percentage. Hence why I don't think EV is a suitable metric here.

      • JonathanU

        HTG – Sorry, got a little carried away with those last posts.

        Having thought about it a little more, in terms of Horace's work, if he was to do a comparable analysis of Apple's competitors (not sure who you would pick as there are so many to choose from and so few that would actually make good comparators) then I think using enterprise value would be the best numerator. Easier to use EV as it makes for a cleaner comparison across companies.

    • Doji


      P/E is a primitive proxy for valuation. Free cash flow /enterprise value peer comparison is the better method.

      A large portion of Apple's valuation is concentrated in the iPhone. Any missteps and faltering in the product and its market acceptance would quickly erase value. Five years ago, Motorola's high flying RAZR fell from grace in matter of few quarters because of product issues and competitors catching up. It is an example of disruptive volatility of technology markets.

      Objectivity. Also, while I understand this blog is biased in favor of Apple and biased against its competitors the majority of the time, one needs to remain reasonably objective to maintain credibility. Let the facts speak rather than try to twist the conclusions to a position that supports favorable Apple arguments.

      • Joe_Winfield_IL

        I'd love to see the other metrics, but I can live with P/E. It's not meaningless with AAPL, as the company throws off cash in a way that would make most blush. I'm sure they play tax games (in particular their refusal to repatriate to the US), but their debt-free status takes away a lot of opportunity for wreckless accounting. Also, they have much less incentive than their competitors to mess with quarterly earnings; they always trounce expectations and thus are not constantly forced to massage numbers to match guidance. In short – if P/E is a broken metric, it is much more broken for Apple's competitors than it is for Apple. Using the easily attained P/E likely waters down the arguments rather than strengthening or "twisting" in favor of AAPL.

        The Asymco community certainly is very pro-AAPL, but there is nothing in Horace's writing that "twists the conclusions." There is no wordplay or sleight of hand required to do what Horace does. He is not picking and choosing specific 2 or 3 quarter periods, timed with product launches, to try to maximize his point. He is showing a full 4+ year chart and trying to apply scrutiny and analysis to the trends he sees. His bias is based on the performance of the companies he follows, not on personal compensation. He has no financial incentive to be wrong about AAPL. Also, it is your opinion, not a fact, that FCF or EV are better than P/E. If either was a perfect measure, it would be included on the "snapshot" page of Google, Yahoo, Fidelity, etc. stock quotes. There is no ideal way of comparing companies, but on this site P/E is the de facto measurement. The decision was likely arbitrary, but Horace now has dozens of charts, graphs and posts that reference P/E. To change now without reason would require a lot of work with little payoff.

      • JonathanU

        The reason P/E is widely used is its ease of calculation coupled with its ubiquity throughout the financial world.

        However, It is a pretty bastardised metric and most analysts will attest to this fact.

      • Joe_Winfield_IL

        Agreed on both counts.  It's kind of like the Dow 30 as a barometer for the overall market; a number everyone looks at and tracks that does a good enough job that it isn't replaced by a better metric.  But there is some value in the ubiquity of P/E for a blogger with wide reach.  He isn't required to get into long-form explanation for those in his audience who don't aren't familiar with EV or FCF (or beta, 50 day moving averages, short interest, PEG ratio, etc.)  The blog is about ASYMmetric COmpetition, not advanced finance.

        It doesn't matter to me what tools Horace uses to make his point; EV would be fine.  I was just surprised to see someone aggressively referring to the post as a manipulation of data to meet a bias.  The onus is on the accuser to prove his point, and @Doji didn't at any point make a scientific argument to counter Horace's claims.  

        The comment also cites the fall of RAZR as though it is relevant, when in reality the RAZR phone was sold for years, not months, with almost no material improvements over its life cycle.  And Motorola didn't build anything sustainable around the success of its once-beloved phone.  We never heard the words "ecosystem" or "halo" to describe customer loyalty to RAZRs.  The phone also didn't do anything unique – it was literally only differentiated by its design.  I'd like to think that the iPhone is incredibly different from the RAZR in all of these regards.  I'm not saying there are no relevant historical examples from which to choose, but when a guy calls out Asymco's math as biased the sentence after citing the RAZR as a cautionary tale, I lose a little respect for his words.

  • claimchowder

    Steve Jobs says: Manage the top line, the bottom line will follow.
    As an investor, rather than a trader, I am extremely happy to see AAPL's management NOT trying to maximize my shareholder value. They are maximizing the company's value, which serves me much better long-term.

    • cdodge

      They aren't maximizing company value. Company value is measured either in market capitalization or enterprise value. Both of these metrics are directly dependent on the share price.

      • claimchowder

        You are probably right from an MBA perspective, which I do not have. I'm purely an educated person who thinks independently, and am not familiar with MBA jargon, to which the term "company value" may belong. I meant it generically, so please forgive me my ignorance of financial terminology.
        My preference for deemphasizing shareholder value and going for the top line comes from my experience: I have been watching literally dozens of companies decline long-term due to their emphasis of shareholder value, which is almost universally considered to be short-term. Many of these companies have sold their crown jewels for short term profit (e.g Apple under Sculley, when they sold their GUI IP to Microsoft), some axed their development departments, some fell for baits that Microsoft and other exploiters put up for them. Their management had no chance but swallow the bait because they had previously committed themselves to shareholder value. DEC is a good example for that, as is SGI. IMHO the moment you commit yourself to shareholder value your actions become to a great extent calculable by any outside party, and you will be exploited by those who are skilled at this questionable form of art.
        This is a very bad thing, except of course for the exploiting party. But: I refuse to invest in such companies, no matter what their economics, due to ethical reasons.

      • russell

        I see your point, but i don't think it's Apple that is the problem with the value issue, it 's the money on the sidelines that doesn't understand the value at this time. These things can be out of whack for periods of time, but at some point enough people will figure it out and the price will catch up to the intrisic value.

      • cdodge

        Apple might not be the problem, but they are definitely not providing solutions either. Apple needs to show the value to those sitting on the sidelines. Apple's P/E has been out of whack for 2.5 years now, and I think it is about time management has tried to do something about it. There are really no tech stocks that you buy and forget about. The industry evolves way too quickly for that. As Horace has pointed out recently, you can't predict the future of the industry looking at the past. It is very unpredictable. I want AAPL to be fairly valued while it is on top because no one knows how long that will last. Right now it seems safe for the next 3-5 years but after that who knows.

      • arthur lecuyer

        Yes and for 2.5 years we've been either in recession or weak recovery -with fears of deflation or double dip recession.

        Remember while other companies lost 25, 30, 35% of their value, Apple lost over 60% and it took nearly 1.5 years to surpass their pre recession high. Of course all the while Apple was beating the pants off the street. 20 consecutive quarters (5 years) of blowing away the analysts consensus.

        I'd say the market has had ample past evidence to fairly price the stock. And, there is nothing Apple can do to prevent the hedge fund manipulation.

      • eric

        and that is why Buffet kicks everyones butts over the long term. Well estab. mgmt team lean balance sheet and great ability to generate reliable earnings and cash flow. That is how you value a company. Stock price ? Not so much.

  • John

    RIM’s history might be instructive. They are adding subsscribers, profits are up, but the stock price is on a steady decline. Now we all know about the stories. RIM has no obvious plan for the future. Market share is falling. Yet the financials are not bad.

    Also, a lot of people don’t understand Apple’s business so won’t buy it. My mom living in Michigan said that she asked her adviser about APPL and said it was growing like crazy but he didn’t know about that so he didn’t recommend it. He tended to recommend established blue chips and Michigan based companies.

    Put it another way. Why sell at this price? If APPL is worth $450 why sell for less uess you need the cash?

    • greg

      Your Mom should fire her advisor. If anything the last 2-3 years has taught us is, there is no such thing as a blue chip stock. Secondly, if he doesn't know about Apple's growth, then he shouldn't be allowed near other peoples money.

    • Laughing_Boy48

      I'd think that any investor would have second thoughts of buying Apple. It would appear to be a very poor investment. A large, strong company that's making huge amounts money and has huge growth potential and yet the overall value of the company continues to decline certainly does make it look like a poor investment. You can understand a stock declining in value if they're losing money, but a company that's making money and losing value doesn't make any sort of sense. Any small revenue hiccup would send the stock plummeting and that's no good. Apple bulls are only guessing that the stock will increase in value but there's no indication of that happening. Let's face it. Investors are not buying this stock for whatever reasons. I think they're scared to touch it. Only Apple bulls think this stock is worth $450. In reality it isn't even worth $350 since it can barely hold that while the general market is going up.

      Over the last six months, both Dow and Nasdaq have outperformed Apple which shows that Apple is a rather tepid performer despite all those huge earnings and free cash. Wall Street continues to expect more and more from Apple and Apple is going nowhere based on those high expectations.

      • Kizedek

        Just like I thought. What you are telling me is that it is all one big popularity club over there at Wall Street.

        Nobody is buying it, because… well, nobody is buying it. Oh, Apple's "value" is declining, now I get it. Wait a second… why is Apple's "value" declining? Because nobody is buying it. Love me some of that analysis.

        Forgive me for raising something that might be a little awkward for some folks, but I thought this was precisely what we were discussing, WHY is nobody buying it.

        IF there is no REAL reason that ANYONE can see for NOT buying it (and we have yet to find ONE), how is buying it a POOR idea to buy it as an investment and wait for the world to finally wake up and smell them apples?

      • KGB

        Agree w your last sentence. Possible causes of stock price stagnation/extreme fluctuation……? There are likely multiple reasons including panic selling by small investors (assoc. w any negative rumors, etc), constant churning by short traders ('why buy the cow when the milk is readily available' sentiment), computer-triggering stop-loss points assoc. w institutional investors, and the usual suspects (namely, shorting by hedge funds). The hedgies are considered by some folks to have a hand in the predictable selloff/runup/selloff cycle in pre-earnings reports……typically with the final selloff occurring in After Hours trading….viz. AAPL reaching 357 last week AH.
        I am sure there are other more rational reasons for 'not buying'.

  • jim

    ttm eps is $20.98 not the $20.97 you have. Just letting you know. Thanks for article.

  • Travis

    Right on brotha, me too, soon as i saw that deferred rev i jumped in, been 100% invested in aapl since august 2007.

    @unhinged, I personally can stay solvent way longer than the market can stay irrational….See $202 -$78 to $350…I'm still here.

    apl doesn't care about shareholders nor should they, it's a distraction…do you want them to be stock traders or a CE company with customer satisfaction being #1.

    I love how aapl fucks with Wall St and the media…being MUM on everything, just pisses them off to no end, and all Wall St wants is a piece of that cash by way of fee's. Cause soon as they spend it and Wall st get's it's hands on it, it's down for the stock price cause now aapl is worth, less.

  • Asymco Follower

    Hey Horace,

    I wanted to bring this to your attention : ” If earnings are expected to grow, E1 will be greater than E0, and the justified leading P/E (P/E1) will be smaller than the justified trailing P/E (P/E0), because you are dividing by a larger number when you are calculating leading P/E. Infact trailing P/E will be larger than leading P/E by a factor of (1+g), where g is the growth rate.

    E0 – EPS of last earnings/reporting period
    E1 – EPS of next earnings/reporting period

    Source: Kaplan Schweser

  • Childermass

    "One of management's main roles is to maximize shareholder value".

    Only by running their company well, not by manipulating the price of the stock.

    Management have a duty to run their company as well as possible. The stock market then decides what the stock of that company is worth. What can management legitimately do about that?

    My experience is that shareholders fall into two broad categories. Those that expect management to somehow manage the stock price (or try to) thus joining them in price rigging, and those who are delighted to hear management barely knows what the stock price is. Management that are constantly fretting about the stock price are not focused on running the company.

    • JonathanU

      Since when is doing stock buy backs manipulating the share price? Or have I misunderstood you?

      Stock buybacks are merely the most tax efficient way of returning excess capital to shareholders. No stock manipulation involved.

      • Childermass

        Stock buybacks are a way of returning excess cash to the owners, as you say – a tax efficient way of paying a dividend, they are not a way of guaranteeing shareholder value. My point is that management have enough to do running the business well not worrying about the stock market and its views.

    • cdodge

      Any shareholder that is delighted by the idea of management barely knowing the stock price is an idiot. Management should and thankfully does know the stock price. Most, if not all, of them are shareholders.

      Buying their own stock is the best way management can show shareholders and potential investors that they believe in the future of the company. It shows they think the stock is significantly undervalued based on their projections of where the company is heading. If management believes the stock is fairly valued, then they should return excess capital in the form of a dividend. Horace posted that Apple has enough cash on hand to run the company for 7 years even if they don't sell one more item. To me that screams excess capital.

      • Childermass

        I am not speaking hypothetically. I am reflecting on twenty years in the public sector and the hundreds of professional fund managers I have met who genuinely believe management should run the business and not worry about the stock price. Every one a long term player who understands what they are doing.

        These are the people you have just labelled as idiots.

        Not being obsessed by stock prices does does not prevent management from conducting buy-backs. Again I speak from experience.

        Managers are indeed often shareholders in their own business, but the best of them do not go home every night and pore over the stock charts. They are long term holders, not looking to turn a quick profit, who are happy in the knowledge that over time the price will properly reflect the value of the business they are building. They do not need to know the price on a daily basis.

      • cdodge

        Frankly, I don't care about your 20 years of public sector experience or your professional fund manager acquaintances. That gives you no credibility in my mind, as this is the internet and no one knows anything about you. They should base your credibility solely on what you write. You should share your vast amount of "experience" by putting something meaningful on paper, not by saying trust me I have all of this experience.

        I never said management shouldn't run the business. That should be their top priority. I also don't want management poring over the stock price every night, but they can take a look once a month, once a quarter or as infrequently as once a year; it doesn't matter to me. This isn't an overnight phenomenon. It has been going on for 2.5 years and management hasn't done a thing about it.

      • arthur lecuyer

        You sir, must be an idiot.

        I know I'm late to post but if you read my previous post 2.5 of 2.5 have been turbulent economic times. Times that Apple has crushed all analyst expectations.

        That is what management should be concerned about. Taking care of business rather than worrying about outside forces which they have zero control over. Believe it or not share price is beyond their control, just as the economy is beyond the control of government political officials.

      • asymco

        Let's keep things civil. There is no reason for name calling.

  • Joe_Winfield_IL

    I didn't see the light until late '08, but I loaded up at that point. Lately, I've been buying January 2012 calls at various price points. It's much cheaper than buying the stock (and has the potential for much higher returns), but it doesn't have nearly the risk of short expiration calls. I'd like to think that even if the P/E doesn't rebound, the share price will be compelled much higher over the next 9 months by 3 more quarters of massive y/y revenue and earnings growth.

    We're all sweating the price, but AAPL tends to move in very large chunks when it goes. It stagnated for 5 months last year around $240 before making a 50% move over the following 5 months. We are currently 3 months into another stagnation period, and for it to get back anywhere near its typical P/E it will need to move a lot more than 50% pretty quickly.

  • B Patel

    I follow Apple closely and am really puzzled why market trades it at low PE, considering many outstanding favorable factors it has? Above comments are may be part of the reasons, probably a small part. All companies have some negatives, but usually not punished like Apple. It is mind boggling how forgiving Amazon's investors are, giving it over 70 PE? I am not convinced that some of all the reasons above is a whole?

    • Laughing_Boy48

      Amazon can do no wrong in the eyes of investors and Wall Street. It seems to be a very good investment. It's smoking Apple soundly. No matter what Amazon does, the stock goes up. Who wouldn't choose Amazon over Apple. Everything Apple does causes the share price to drop. I can't imagine how a company can have products in huge demand and have future potential and the stock continues to fall. How can something like that make sense to an investor? It would certainly appear that buying Apple stock would be like throwing money into a black hole.

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  • chandra2

    Horace: Is the earnings recognition method change partially responsible for the PE band shrinkage?

  • gslusher


    See my earlier reply. Other companies dropped about as much as Apple did between August and December 2008.

  • JonathanU

    Agreed – the equities market is trillions of dollars deep. No matter how large Apple gets by way of market cap, there will always be someone else to buy their shares.

  • JonathanU

    Horace – am interested to hear you say you don't think Apple is overcapitalized. Am wondering what your rationale is for this statement?

    Personally I have racked my brains to try and justify why Apple would need $66bn in net cash on their balance sheet coupled with free cash flow of over $20bn… Every answer I come to can only ever dream up using ~$10-15bn max (short of making some outlandishly large acquisition – of which even then I can't see any that would make much practical sense).

    I think a great example of using cash wisely is the use of prepayments for locking of key component supplies – but even that only used $4bn…

    Unless I'm missing something, there really is no reason for that much cash on the balance sheet. But keen to hear your thoughts!


    • Fritzlan

      "Personally I have racked my brains to try and justify why Apple would need $66bn in net cash. . ."

      Never underestimate Steve Jobs imagination.

      He might be thinking of starting a phone company, buying Netflix, setting up manufacturing in the US or something we can't even imagine. Apple is one of those companies for which the phrase, "If it ain't broke, don't fix it" fits very well.

    • asymco

      There is no reason if that reason is defined as deploying the capital in some way. But capital has option value even if it's not deployed. I won't elaborate here on what that is but suggest instead reading this as allegory:

  • B. Ford

    A couple of macro market factors are at play here, I suspect. Namely, the mentioned rebalancing of the Nasdaq, but also the markets' money is still going into commodities at the expense of mega caps like AAPL. I've seen a few fund managers mention this in recent days. See this article in Investment about Legg Mason's Bill Miller.

  • B. Ford
  • sweeps in CA


    I'd like to once again thank you for your research and analysis on this website. I'm gaining a great education from you and many of the other commenters here.

    I have a couple observations regarding your charts. In the third one, P/E vs Growth Q1 2007 to Q1 2011, you have 6 blue circles and 11 orange plus signs. Could the blue circles be outliers? I understand the significance of the iPhone, but perhaps a longer time horizon will give a different picture. Also, the lofty valuations of the market in general along with the consumer's attitude towards his/her own wealth contributed to higher P/Es pre-recession. People felt a lot wealthier between Q107 and Q208. After Lehman Brothers filed for bankruptcy in September 2008 and the crisis that followed, that was the first time I thought the U.S. was also bankrupt, and I had lost much confidence in the system. We saw a massive exodus of clients and wealth. The world economies were falling off a cliff. To echo other commenters here, it would be nice to see a comparison, perhaps to QQQQ, the Dow, or the S&P 500 during this period.

    In the fourth chart comparing y/y rev Growth, the percentages between Q208 and Q209 for the up-and-coming main revenue driver, the iPhone, are explosive, ranging from 184% to 801%! Looking at Q409 thru Q111, perhaps it is lost on the general market, and thus, a lower P/E, but when considering the logistics of manufacturing, the ramp up of a new product cycle, and the sheer numbers that Apple is dealing with (tens of millions,) the y/y rev Growth (between 74% and 126%) continues to amaze me. Simply, Apple is making a lot of money, and likely will continue to. Naturally, I want more and more shares of it. Why not everybody else?

    I'm left wondering how much wealth is still on the sidelines, and in better economic times do you think the P/E will return to a pre-recession norm?

    • asymco

      You can test whether P/E is an outlier by comparing with history beyond the short period I put forward. You'd see that current ratios for Apple are very low relative to itself, or a peer group of technology companies or a peer group of large companies (S&P 500).

      None of those proxies had or have growth nearly as high as Apple is now enjoying.

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