July 2011
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Day July 25, 2011

How we do all this will never be the same

In a new ad for the iPad Apple once again makes the case that the tablet is a good substitute for a PC in a number of use cases (and permits some new ones.)

We’ll never stop sharing our memories. Or getting lost in a good book. We’ll always cook dinner and cheer for our favorite team. We’ll still go to meetings, make home movies, and learn new things. But how we do all this will never be the same.

This belief that the iPad “cannibalizes” the PC is a powerful concept. The growth of the PC has certainly been affected. But has the Mac’s growth also been affected?

Tim Cook seems to think so. In the earnings call he said:

In terms of cannibalization, we do believe that some customers chose to purchase an iPad instead of the new Mac during the quarter, but we also believe that even more customers chose to purchase an iPad over Windows PC. And as I’ve said before, there’s a lot more of the Windows PC business to cannibalize than the Mac.

If we look at the behavior of Mac vs. iPad, the following chart may be useful:

Apple's share price (adjusted for earnings and growth) reaches new low

After Apple reported earnings growth of 125% its share price dropped to a P/E of about 15. This reduction in valuation is part of a trend I’ve written about for over a year so there were no surprises. The first chart below shows how the stock has traded between increasingly lowered P/E bands.

As the second chart shows, not only is the P/E ratio declining, but when seen against the trailing twelve months (TTM) average growth rate, the P/E/TTM ratio is now at the lowest since the great recession (around 0.17–a value of 1.0 is a rule of thumb for “fair value” in a growth stock).

Those values include cash. Excluding cash, the P/E as of Friday was 12.4. On a forward basis (my estimate–which has shown be be conservative lately) the P/E is around 7.

Perhaps some day in the future