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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 investors will come around to looking at Apple as a growing company, but there has been no such inclination for over two years. As I’ve pointed out numerous times, growth and valuation are moving in opposite directions.

The only correlation to the stock price has been found on the balance sheet, not the income statement. Looking again at the relationships between cash and the stock price, we see a clear relationship (r squared of .9)

After a lapse during the first quarter, the relationship that has been in place since October 2008 is returning.

Note the formula of the trendline which allows some interesting guesses on what the stock price will be. For example, putting $95 in cash per share results in a share price of $500. Let’s see if the relationship holds until then.

 

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

    Wondering if this phenomenon is or has been present at other innovators where the law of large numbers was presumed in play, and thus valuations declined…?

  • Ahmedat

    Could be they are being punished by the dividend seeking crowd.

    • huxley

      That's an extremely generous reading of their ability to affect Apple's stock price, I don't think the dividend seekers can find their own asscheeks with both hands and a map.

  • ScottyRad

    This would seem to be a great example of why computers are able to effectively trade on the Stock Market, because the explination that people give for what they do and what they actually do (like Malcom Gladwell talks about in Blink) can (and often are) very different.

    Using Gladwell's terminology, Horace has "Thin Sliced" past all the irrelevant data and has found that what you need to pay attention to is Apple's Cash to predict stock price (at least for now).

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

    Even based on this highly conservative cash and securities valuation with its current trajectory, Apple's share price could hit 1000 dollars within three to four years if earnings continue to accelerate on the existing curve. The share price based on more traditional valuations would be downright shocking.

  • Nate

    I believe I’ve heard commenters on this site reference the high nominal stock price as a factor in keeping it down. Is there research into whether a 2-for-1 (or 5-for-1) split might alleviate that issue? Or is splitting the stock a red flag for investors?

    • chandra2

      The talking heads in Fiance TV used to say a decade back that splitting stock is an indication of confidence by the company. May be they were just talking about the market sentiment then. A lot has changed in terms of market sentiment in the past decade. So they can split the stock or not split the stock, it should not matter. But since there seem to be more people who believe splitting the stock helps, let Apple split the stock. It is not going to make anything worse.

  • Eric D.

    Apple's share price stagnated last quarter after weak iPad numbers and the anticipated seasonal iPhone refresh. With a killer quarter completely breaking the annual rhythm, there is suddenly evidence that Apple may finally be ramping up to fully meet global demand. Another quarter or two of ballooning shipments should start convincing investors that Apple is truly winning the post-PC era and there are no serious challengers in sight. October and January will be telling.

  • Travis Lewis

    PE/TTM ratio is my favorite to use by far. It shows how massively undervalued AAPL really is. This states you are buying $1 of current growth in AAPL for 17 cents. Try doing this with other stocks. Nothing even comes close. GOOG is above $1.00 and amzn is up in the $70 for $1 range.

    • Travis Lewis

      I didn't feel right just leaving "around" figures. Here are the facts

      AMZN PE 93.82 / ttm growth rate 1.3% = $72.17
      GOOG PE 22.3 / ttm growth rate 20.4% = $1.09
      vs what Mr.Dediu has pointed out already
      AAPL PE 15.57/ttm growth rate 90.2% = $0.17

  • billyk

    To get the price where it belongs is to get the shares into the halo effect.
    Outstanding work Horace.

  • Scott

    Travis,

    Out of curiosity, where did you get the growth rate % (i.e. 90.2% for apple)? I am new to stock investing and am finding this discussion very interesting.

    • Travis Lewis

      Scott,
      The best place to get the numbers would be your broker service. I always use GAAP only figures. AAPL's past 4 qtrs earnings adds up to $25.26 (ttm) the prior 4 qtrs adds up to $13.28. = 90.2% growth. This way it is smoothed out. I did this same math for all the companies. You can really use any metric you like, as long as you do the exact same for all your comps.

  • Scott

    Thank you Travis. Very much appreciated.

    3 more question that I would love to get some insight on if you have time:

    1) Has anyone done any analysis on day to day patterns based on X# of up or down days in row results in an X% chance of the next day being up or down? It would seem to me that there must be some psychology to the market's general behavior.

    2) It seems like companies that are "growth" companies get a higher P/E than others. If so, what makes a company a growth company? For example, from the outside, it seems like AMZN, GOOG, and APPL are all "growth", but the P/E's are all so different? What makes one company get a higher P/E than another?

    3) With regards to APPL specifically, how can you best determine when to buy the stock? For instance, right now the stock is at an all time high, having just run up from 315 or so to basically 400. To me, it would seem that you should not buy now b/c a pullback of x% is "statistically" (admittedly no rationele behind this statement) there should be a 5-10% pullback. BUT, if the P/E is "only" 15 and APPL should be valued as GOOG or AMZN, then the stock at 400 is "cheap". So how do you make a decision to buy now or wait for a pullback? What's the logic of the decision process?

    Again, any and all help is appreciated in advance!

  • Scott

    Thanks Travis. Very much appreciated!

    If you have the time, I have 2 more questions:

    1) Why does one company have such a different P/E than another. For instance, in my non-professional opinion, BOTH AMZN and APPL are growth companies. Why the disparity between their P/E's? Why does the "market" pay such a lower price for APPL?

    2) How to analyze when to buy? If APPL's P/E is low compared to "others", then now is a good time to buy, correct? If the fact that APPL has run up 85 points or so from 315 in such a short amount if time, one would think there should be a pull back and the stock can be bought back less expensive in the near future, correct? If so, but why would the stock pull back? This is all so confusing to me. There seems to be no real logic to it. So, what is the thought process of deciding on a good entry point?

    Again, any and all help is appreciated.

    • http://www.fallibleideas.com Elliot Temple

      Do not try to time the market. If you want to buy apple stock to hold long term, just buy it now without even looking at today's price. Or, if you are buying a lot, split your money into (for example) 3 equal portions. Then you could buy today, in one month, and in two months. Set the dates you will buy in advance, don't watch the stock price.

      The price changes in apple stock lately don't make sense. Don't worry about that. Apple stock is underpriced and in the long run things will sort themselves out. But there's no way to know if it will have more random price drops to take advantage of prior to reaching a rational price (and if it does have a price drop, there will be no way to know when the bottom will be).

      Even most professionals should not be trying to time the market and make short term predictions. Do not try it yourself.

      • http://www.curi.us Elliot

        Forgot to clarify: the point of splitting up the money is to reduce risk. You can approximate the average stock price over a period of time instead of on a particular day. That's somewhat safer. If you buy everything today and the price drops tomorrow then buying in chunks will have been better. But the price could also go up. Buying in chunks will not make you money on average, it just lowers risk a bit.

    • Ian

      You would pay for a higher P/E if you believe the price will go up significantly in the future. The market appears to believe Amazon's story more than it does Apple. I think this is because Apple is so mercurial, and therefore hard to predict. AAPL is currently priced according to trailing earnings, which is to say that the market doesn't believe it will grow any further. The market is regularly proven wrong on this point, but I suppose it has to be right eventually!

      • Dongmin

        "I think this is because Apple is so mercurial…"

        Mercurial? You obviously haven't been paying attention to Apple's quarterly earnings for the last 18 quarters. 12 out of those 18 quarters, Apple has grown earnings by 58% or more. Only 1 time has it dipped below 32% and that was during the 2009 recession.

        No other company has CONSISTENTLY delivered high-growth and beaten analyst expectations. No one. There's nothing mercurial about it.

  • Scott

    Sorry for the double posting. I didn't think my first question was posted. Feel free to remove if you like. Again, my apologies.

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

    @Scott,

    1. For this question, remember that past performance is not an indication of future results. e.g during the days prior to major events such as imminent launches of new products, one would *EXPECT* the stock price to reflect the ebullient investor sentiment. However, the reality may be very different. So using statistics to predict the daily closing direction on any given day is going to be futile. If you want to get a feel for the general sentiment of the market, you might be better served doing some research on VIX and understand the macroeconomic factors at play e.g. price of oil, inflation rate, bond yield rates, value of USD vs other currencies etc. For pre-market sentiment look at the stock futures indices as guidance.

    2. P/E ratios are just the price of outstanding shares divided by earnings. Obviously this number can and has been manipulated many times. Stock buybacks like what RIMM and MSFT have been doing is to "juice" the PE ratio so that it appears to be "cheap". However historical data has shown correlation with low PEs and positive returns over a period of 20 years. http://en.wikipedia.org/wiki/File:Price-Earnings_

    3. There is no "right" time to buy any given stock. It's like asking "when is it a good time to buy an iPhone?"

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

    BTW I forgot to add that the markets do exhibit seasonality i.e summer months tend to have worse returns, and Fridays and Mondays tend to yield poorer returns unless it's a long weekend.

    • chandra2

      Well, how come then people with lots of money do not take advantage of this well known phenomenon and sell before summer and sell on Thursdays ahead of those times.

  • Ian Ollmann

    Horace, forgive me, it seems to me that all you've shown here is that the market doesnt believe TTM growth is a good predictor of next twelve months growth for APPL.

    • asymco

      The idea that markets follow any one or even set of rules for valuation has been shown to be false. I'm trying to find some possible explanation of what the majority consensus exists with respect to Apple's future. I have my guess of what will happen. Many others have other guesses. I always find it interesting when there is a big difference of opinion.

  • John

    Just a thought on this. I noticed (maybe on Yahoo) that some 70% of AAPL is held by institutions and mutual funds. My understanding is that they cannot hold more than 5% of their investments in one stock. Could it be that they would like to buy more AAPL but can't because they have maxed out? Maybe that is contributing to AAPL's low price? Worse, every time AAPL goes up it pushes them past the threshold and they have to sell some thus quenching the rally. Just wondering.

    Just as a thought experiment, if AAPL existed as three different companies (iPad, iPhone, Macs and the rest) then there would three times the potential market for the stocks.

    • asymco

      I've heard this argument many times. Sometimes it's said to be "everybody owns it". It may be correct, but what it implies is that the market is not liquid. If there is demand and interest but not enough buyers then it's not a liquid market. The other assumption is that 70% institutional ownership is a fixed quantity. In other words, retail consumers are not likely to buy shares, again implying a lack of liquidity.

      I don't know if this is true, but if it is true, then the liquidity issue would be an interesting discussion topic.

      • Geronimo

        Horace, you are being too polite. This "everybody owns it" argument needs to be called out for what it is — it is bullshit, pure and simple, or perhaps to say it a bit more diplomatically, it is an urban myth (one of many, sadly) propagated by semi-illiterate financial bloggers and rent-seeking "analysts" who need to periodically make up content to fill their content-farmed blogs and "reports". The worldwide financial industry manages many trillions of dollars in investment money. Are we really to believe that a company with a market value of $350 or so billion dollars, a minuscule percentage of the value of even just the U.S. stock markets, could simply run out of buyers because "everybody already owns it"? That defies common sense. If the price is right (and barring all kinds of other reasons why the market might, and often does, behave irrationally), there WILL be buyers. People who cite the 70% figure are making an error of basic logic. It means that 70% of Apple shares are held by institutional investors — not that 70% of worldwide institutional investors are holding Apple! In other words, even a 100% institutional investor holding rate would not matter, since there would still be lots of new institutional investors who would be happy to buy an undervalued stock from the existing institutional investors.

        By the way, this is off-topic but thanks for writing your delightful blog, I really enjoy reading it.

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  • th3uglytruth

    Horace…get blog by the way.

    I wonder, given the data sets you have…would it interest you to create a chart showing the impact of stock splits vis a vis return over time? In other words…to show that stock splits don't have any meaningful impact in creating shareholder wealth over time?

  • Ben

    The stock market is all based on hype. Why relate a stock's movement to earnings, up or down; or, new product introductions, or sales increases/decrease. If a company like APPL never pays a dividend, what difference does it make if make if it comes out with good news, or bad news? In other words, it just hoards it's money, or uses it to make more money — but not to share with it's stockoholders.