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Quantifying the phobia of owning Apple shares

As the market continues to exhibit signs of instability, an interesting paper[1] identified a correlation between the U.S. stock market and an index of the U.S. Financial Conditions. This index measures the assessment of the probability of a crisis.

The conclusion is that an imminent crisis mentality pervades equities markets today and implies that pricing is largely disconnected from fundamentals. On this blog we’ve discussed the topic of fundamentals and marveled at how pricing seems to be largely exclusive of it.

The case is made by the following chart:

 

The first chart shows the share price (blue) and the earnings per share (EPS in green) as well as several multiples of EPS. During the period of 2006 through 2008 the stock ranged between a P/E of 35 and 45. beginning with the collapse in confidence due to the banking crisis, the share price fell to within a range of 15 and 25. Now, with Apple’s growth accelerating above 100%, the stock price seems to be sliding below the 15 P/E bottom.

In the second chart I show the P/E in blue and the P/E/trailing Growth. Adjusted for earnings growth the equity is cheaper now than at the bottom of the last recession. You can also observe the trend or slope of the decline in the P/E/tG. It might be alarming to see the decline but it also might be comforting to know that the P/E/tG cannot go to zero. Either Price has to go to zero or earnings or growth have to go to infinity. The closer P/E/tG goes to zero however (it’s at 0.17) the more undervalued Apple appears to be.

Naturally these metrics of P/E are arbitrary and the price is simply what the buyers are willing to pay for the equity. But the value of any metric is the trend. The value can be compared to a different time or to a different equity. The trend here is that Apple, at least, is being discounted at a time when it’s growing more robustly than ever.

Which is why finding an explanation is so important. This is where the paper sheds some potential clues. The author concludes that there is a pervasive crisis phobia which affects multiples. Paulsen writes:

If cultural mentalities were less crisis-phobic today, what would the PE multiple be on the stock market coming off a 12.8 percent profit quarter with a 2.2 percent Treasury yield and only about a 1.6 percent core consumer price inflation rate? Certainly, much higher than 12 times earnings! 16 times earnings? 17 times? This simply illustrates just how much the crisis-centric mindset is depressing investment potential and it also suggest how much opportunity there is to increase stock valuations just by improving the cultural mindset. Long term, the real investment opportunity is not a dramatic improvement in economic or profit growth (although either or both could occur), but rather is just a slow but steady decay in “crisis-fears” similar to what we experienced during the last recovery.

—-

Reference:

  1. A Crisis Phobic Investment Culture, James W. Paulsen, Ph.D. Wells Capital Management.
  • Davel

    I think institutions are concerned with the financial issues of the west and slowing Asia.

    Individuals are concerned about their job, inflation and their respective govt.’s inadequacies.

    The markets are all over the place. From flash crashes of highly liquid stocks, to see sawing of markets based on global issues make for an unsettling environment.

    Personally I don’t know whether the market will be up or down 10% in the next month. This makes me wait.

    Right now cash is king.

    • Anonymous

      Cash is king only if it is employed. When will you decide it’s time to stop waiting? You seem to be one of the “crisis phobic investors”.

      • davel

        I do not know. The market was down 2/ 2,5% today. Various factors are involved. If you have money to invest would you invest today? If so in what? And why today rather than next week?

        For me I rather wait. I do not like what I see. Too many moving factors for me.

      • Anonymous

        I would buy Apple. We are past peak oil, but not even close to approaching peak computing. And Apple is the best investment in computing.

      • Anonymous

        I would buy Apple. We are past peak oil, but not even close to approaching peak computing. And Apple is the best investment in computing.

      • MOD

        For cellphones, I would find a company that is copying the Symbian OS (look and feel). You can’t go wrong with calling and texting.

        As far as computers, I would invest in a company that is copying the Windows OS, and that has a mouse. You can’t go wrong with mice.

  • http://www.informationworkshop.org Mark Hernandez

    Attempting to quantify an “intangible.” I love it!

  • MOD

    Buy when others are fearful, sell when others are greedy. Paraphrasing Warren Buffet.

    I made a killing buying during the depths of the recession. Obviously I was one of the few. Most were selling.

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  • Danny

    Here is a study that removes both perception and earnings and is still predicting downward pressure on valuation based strictly on demographic moneyflow : http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html

    • http://www.asymco.com Horace Dediu

      Did this demographic money flow change within the few months when valuations plunged?

      • Danny

        I’m not sure which months you are referring to (Fall 08?) or if you are leading to something with your question..? Also it seems a purpose of plotting demographic shifts in money are for macro trends with the smaller valuation oscillations such as liquidity shifts/crashes/quarterly earnings occurring within (although still affecting the macro flow of money in a demographic, such as scaring baby boomers to withdraw from equities to pay for retirement earlier than planned).

        Also, the study only addresses the S&P as a whole, representing very broad asset allocation among the demographic, of course. And also only US citizens I think. But point is that there are more forces than perception/trend or earnings and it would be limiting oneself to draw a conclusion from just those.

      • Chandra2

        Horace: In this case, you are a bit too quick to disparage that academic work. I think that paper essentially argues that the average risk premium goes up as the population ages. As the risk premium goes up, the average P/E for the duple {growth, interest rate} goes down. This is because, the aging people expect more earnings power and predictability than before. This demographic aspects does not fully explain the low p/e that is afflicting the market now. The fear phobia and aging population may together explain a large percentage of the low p/e phenomenon.

        it is almost like the Quantum Topple effect we see explained in physics. At a certain stage when conditions are right, the system changes to a new state without going through any of the intermediate states and it becomes the new normal. Risk tolerant folks have come back to the market after the near collapse of financial system in 2008-2009. The risk averse aging population has not quite recovered from the shock and may never recover. The net effect is, a lot of risk capital has exited the system. Hence the low P/E. At least that is how I interpreted that article.

      • Chandra2

        Horace: In this case, you are a bit too quick to disparage that academic work. I think that paper essentially argues that the average risk premium goes up as the population ages. As the risk premium goes up, the average P/E for the duple {growth, interest rate} goes down. This is because, the aging people expect more earnings power and predictability than before. This demographic aspects does not fully explain the low p/e that is afflicting the market now. The fear phobia and aging population may together explain a large percentage of the low p/e phenomenon.

        it is almost like the Quantum Topple effect we see explained in physics. At a certain stage when conditions are right, the system changes to a new state without going through any of the intermediate states and it becomes the new normal. Risk tolerant folks have come back to the market after the near collapse of financial system in 2008-2009. The risk averse aging population has not quite recovered from the shock and may never recover. The net effect is, a lot of risk capital has exited the system. Hence the low P/E. At least that is how I interpreted that article.

    • davel

      This is very interesting. Thank you.

      It makes sense as te boomers are aging and as the article says will be more risk averse.

  • gbonzo

    Why focus on the past growth? Market is weighing future growth and the opinion of the market is that future growth of Apple is not that great.

    How could that be? What are the assumptions that would lead someone to estimate that growth of Apple will slow dramatically? Decreasing margins? Android domination? Saturation of markets? What are the drivers that will allow Apple to keep growing?

    These are some of the relevant questions. The fact that market once valued Apple at P/E 40 is totally irrelevant.

    • http://www.asymco.com Horace Dediu

      The fact that the market once valued Apple at P/E means that at the time the market was weighing future growth and the opinion of the market then was that future growth of Apple would be great.

      What were they thinking then? The company had no iPad, no iPhone and the Mac was getting killed. Only the iPod was winning and that looked fragile as the market was saturated and mobile phones were taking share from music players. There were no drivers for Apple to grow.

      Today there is far greater precision in the opportunity given large new markets that have been created with clear headroom. Apple’s growth is more rapid than ever and its opportunities are more easily measured would imply that it should have better growth than at a time when the opposite was true.

      The fact that it does not offers a paradox.

      • davel

        I offer the simplistic rational I see every day to these questions.

        Steve Jobs’s health. As the founder and inspiration for the products his health is directly related to the disruptions Apple brings to the markets.

        Too big. Apple has a huge market cap. Every large fund is fully invested. The re-weighting of the Nasdaq index caused a temporary drop in Apple stock price. As your graphs point out smart phone users are now a bigger % of the phone market than last year. Hence opportunities for growth are more constrained. Every year the competitors get better at copying Apple products.

        All these and more are reasons why there are constraints on the future. The big counter to this is Apple has a huge opportunity in Asia which is a big untapped market as well as Brazil and other largely untapped markets.

        I think Apple’s recent aggressive patent infringement activities show Apple is defending its turf, but the courts are slow and in the meantime the competing products sell.

      • MOD

        “Opportunities for growth are constrained”? You must be kidding. What percent of the world has Iphones, Ipads, and IMacs?

        Keep in mind that Apple is only a very small portion of all desktops. Windows will be replaced. Iphones have just been released in most of the world. (One carrier at a time).

        IPad is a new market that Apple just created from scratch. Competitors are years away from developing something similar.

        That its product is being copied is a sign of success. Why don’t they copy Microsoft of Symbian? Because Apple is what sells and the rest don’t.

        Is there a danger that the copies will outsell the original. Is there is (like Windows was a copy of the Mac which outsold it). But that won’t be until 1-2 years away at best. And I think Apple learned its lesson from that.

        I think this is why Jobs resigned. He saw Cook as a better executor, to make sure that won’t be repeated.

      • Anonymous

        Maybe he thinks there is no potential for growth because Apple appears to have saturated the market where he lives. It’s not clear in that case that most of the world is totally dark to Apple products.

        Maybe that is part of the phobia. Imagine an investor in New York City who didn’t know who Apple was 10 years ago, and now there is this cube on 5th Avenue that is open 24 hours and many more Apple Stores throughout Manhattan. Maybe he didn’t know anyone who used an Apple product 10 years ago, and now there are Macs all around him at meetings, and iPads all over. You could get Apple overload pretty quickly, especially if you are a ThinkPad and Excel type of person. You could easily think that by now, everyone who wanted an iPad must surely have one. But that is not even close to true.

        The other day, Alaska just got its first Apple Store. I’ve been going to Apple Store for all my computing needs, non-stop for 10 years. In Alaska, there are people who are just starting that and will do it for the next 10 years. And then repeat that all around the world. There is plenty of potential for growth.

        And something like 90% of humanity has never owned a PC. This is hardly a saturated market.

      • Anonymous

        Maybe he thinks there is no potential for growth because Apple appears to have saturated the market where he lives. It’s not clear in that case that most of the world is totally dark to Apple products.

        Maybe that is part of the phobia. Imagine an investor in New York City who didn’t know who Apple was 10 years ago, and now there is this cube on 5th Avenue that is open 24 hours and many more Apple Stores throughout Manhattan. Maybe he didn’t know anyone who used an Apple product 10 years ago, and now there are Macs all around him at meetings, and iPads all over. You could get Apple overload pretty quickly, especially if you are a ThinkPad and Excel type of person. You could easily think that by now, everyone who wanted an iPad must surely have one. But that is not even close to true.

        The other day, Alaska just got its first Apple Store. I’ve been going to Apple Store for all my computing needs, non-stop for 10 years. In Alaska, there are people who are just starting that and will do it for the next 10 years. And then repeat that all around the world. There is plenty of potential for growth.

        And something like 90% of humanity has never owned a PC. This is hardly a saturated market.

      • Anonymous

        Maybe he thinks there is no potential for growth because Apple appears to have saturated the market where he lives. It’s not clear in that case that most of the world is totally dark to Apple products.

        Maybe that is part of the phobia. Imagine an investor in New York City who didn’t know who Apple was 10 years ago, and now there is this cube on 5th Avenue that is open 24 hours and many more Apple Stores throughout Manhattan. Maybe he didn’t know anyone who used an Apple product 10 years ago, and now there are Macs all around him at meetings, and iPads all over. You could get Apple overload pretty quickly, especially if you are a ThinkPad and Excel type of person. You could easily think that by now, everyone who wanted an iPad must surely have one. But that is not even close to true.

        The other day, Alaska just got its first Apple Store. I’ve been going to Apple Store for all my computing needs, non-stop for 10 years. In Alaska, there are people who are just starting that and will do it for the next 10 years. And then repeat that all around the world. There is plenty of potential for growth.

        And something like 90% of humanity has never owned a PC. This is hardly a saturated market.

      • MOD

        I don’t have an Ipad yet, nor Idesktops. I live in the SF Bay Area, Apple’s hometown,and these things are not what everyone has or uses. So there is plenty of room for growth.

      • http://twitter.com/speakingvolumes Rip Robinson

        Constraints, Apple overload? Bah, he hasn’t seen anything yet… anyone who gets “overloaded” and thinks Apple has “peaked” because he sees a few more MacBooks or iPads at Starbucks, or sees a crowd every time he passes his local Apple Store, should really read the news.

        There are at least one or two stories per week of this or that company, or this or that university, or this or that sales force, that are buying iPads and passing them out to their staff.

        So let’s not worry about “constraints” for Apple just because more people have a smart phone than had one last week…

        When, and only when, every household that already has a computer (never mind the ones that don’t) has an iPad or iPhone, AND when half the companies everyone you know works for gives them to half their employees, THEN let’s start talking about the “constraints” on Apple’s potential growth! We’ve got a few more households and a few more companies and a few more schools and a few more government agencies to go. You would think everyone could agree that there is just a *little* potential for growth yet.

      • Buckterry

        As the great philosopher Yogi Berra would say . . . . “No one goes to Apple Stores anymore, they are too crowded!”

      • http://www.asymco.com Horace Dediu

        That’s the great thing about a public debate. The best arguments for either point of view are put forward. I believe the arguments you make are commonly held and are probably the best that can be made.

        They are also really bad arguments so my confidence in the opposing point of view only gets stronger.

      • Danny

        I agree. I hear the same arguments all the time that are whimsical and non-factual. I remember wall street said the same things in 2005 before the iPhone. One analyst said, “Sell Apple. Every subway [in my own city] I’m on I see iPods everywhere. Therefore, they have peaked”. Imagine sending rockets to space or performing heart surgery with the same irrational way of thinking.

        And for those interested, there has already been a trillion-dollar market cap company. Apple would not be the first to achieve it. If anyone claims its not possible, prove to me mathematically how the economics are not possible. There is so much money out there, much of it fiat and being printed as we speak. In fact, in our lifetimes we will see many trillion-dollar companies on inflation alone! Of course, a coffee will cost $10USD at that point.

      • Anonymous

        Coffee may well cost more than $1 million a cup within a few years. We could have a financial collapse. There is no political will to stop devaluing the dollar or to reduce our indebtedness.

      • Chandra2

        >there has already been a trillion-dollar market cap company

        Which one?

      • Danny

        The degree to which a mega-cap company like Apple is inventing new and disruptive products is the degree to which mainstream analysts are unable to value future growth and addressable markets. Ironically, if Apple merely added a second button to the iPhone, analysts would probably predict more growth because it falls within their limited ability to forecast consumer behaviors. Deagol clearly plotted the massive overarching inability of the analysts in his smackdown earlier this year.

        Also, small-cap companies often invite speculators and have a small cap and float that often results in very high but volatile PE ratios, often which are as flawed and inaccurately/imprecisely valued in the other direction as Apple is today, and should not necessarily be used as comparisons. Speculators defined in this case as : Interested in investing based on emotion/hope/gut feeling of future success or trend of success.

        Maybe the real question is why are absolutely no speculators driven to Apple at this point in time?

      • http://www.outsidetheherd.com Edward Daciuk

        I may be missing something. Can’t one simply chalk this up to the market saying past growth is not indicative of future growth, i.e. growth will slow. Isn’t the main question: Apple rode the smartphone trend nicely but Android is blunting it in a way that will eventually makes its way to Apple’s margins. So what’s next? And right now the next $100 billion market is unclear. There are some obvious yet murky ones: tablets, emerging markets, enterprise, etc. But there’s no clear massive play at work to sustain the current PEG calculation.

      • http://www.asymco.com Horace Dediu

        The next $100 billion is very clear to me. It could not be more clear.

  • Martin

    Well, I think Apple’s size has to be a major factor here. When I bought AAPL in 1997, their market cap was so low that most institutional investors could bypass them completely. They were in hardly any indexed funds, and their value was so low that when these large investors bought or sold off, Apple was barely touched.

    That’s changed completely. Apple’s up to what, 15% of the NASDAQ index? They’re actively avoiding even being in the Dow 30. When the market moves in these big broad lurches, Apple can’t help but move independent of their fundamentals simply because they represent such a large component of these indexes. Investors protecting near-term profits don’t really care if the stock falls because of a bad jobs report or because Apple missed earnings, so if they can have the same impact on the stock price, the risk is the same.

    Until 2008 I regularly traded Apple options but the broader swings in the market due to economic and political events completely overwhelmed anything Apple could generate from fundamentals. Where before that I could count on the stock rising over a certain period of time due to strong sales and profits, after that I couldn’t any more. Apple could have blowout earnings but some statement from Bernacke would wipe that out. That never happened when Apple was a much less valuable company.

    Put another way, in order for Apple to show a 2007 P/E today, investors would need to be willing to dump $700B into the stock. That’s what – about 15% of the total market capitalization of NASDAQ (more since you’d need to exclude AAPL) and add almost 750 points to that index – a 30% gain. That’s massive.

    • http://www.asymco.com Horace Dediu

      So what you are suggesting is that Apple is no longer liquid. It’s too big to be fairly valued because there isn’t enough money in the world for it to be traded at fair value. It’s like trying to buy something the size of a country. Say Italy. Everybody would love to have it but nobody can’t raise the cash so it sits for sale forever.

      • Eric D.

        And yet, there’s a report that Foxconn is supposedly shipping 20 million iPads to Apple this quarter (ending in October). It’s not hard to imagine Apple selling over 100 million iPads in 2012 or 150 million in 2013.

        Also, all that money that was invested in downward trending stocks like HP has to go somewhere. It makes sense to bet on a stock that’s been averaging over 40 percent growth year-over-year. Even if it only goes up 25 percent next year, hey, that’s like Madoff money. Except you get to keep it.

      • Martin

        Oh, be careful of those shipping estimates. We’ve seen those before be 2x what Apple actually sold – particularly toward the end of the year. At the very least, we know that Apple builds product they know will be in high demand for the holidays ahead of demand so they don’t run into shortages. Foxconn simply can’t scale up for one quarter to the build rate Apple would need across all of their product lines, so they ramp up well in advance.

      • Anonymous

        I don’t remember even a single time where I heard an estimate of what Apple would sell in the future and they didn’t exceed that estimate. Every iOS device doubles in sales every year, and every year they add a new device. Last year they sold 2x the estimate during the holiday quarter.

      • Anonymous

        “Also, all that money that was invested in downward trending stocks like HP has to go somewhere.”

        Eric, please be careful to think through the arithmetic. HP is not buying their shares back. When the share price falls, say from $40 to $24, you get the $24 from somebody else who’s decided that HP is a good prospect. (Your $40 went to somebody else who thought that was a good price to get out, and was re-invested a year ago.) The $16 difference? The only thing that’s changed is your accounting. You have the $24 you got from selling, but the buyer doesn’t.

        This is an extension of my long-standing eye-roll any time somebody says “investors were taking money out of the market” because stock prices fell. Yes, some investors took money out, but other investors put the same amount of money in, than was taken out. (Oh, yes: thanks to the magic of commissions, the brokers took some home with them. But they do that on up days just as much or more.)

    • Anonymous

      I don’t understand the perception that investors need to “dump x billion $” into apple for it’s share price to appreciate to a particular level.

      If apples share price were to double, it does not mean investors have to inject money to equal this doubling in value.

      All it would take for apple to trade at $600 a share would be for one share trade to be made at $600. Thats an oversimplification for sure, but the same basic principle applies whenever a major announcement is made after hours about a stock – the next trading day the stock might open 10% higher, but it doesn’t mean that investors have all of a sudden invested the equivalent of an extra 10% of a companies value. Infact it would mean all current shareholders had received a 10% increase in their share value, with no shares trading hands for the vast majority of them. This is why the stock market was described once as the greatest tool of wealth creation in history.

      • Anonymous

        You’re certainly right that doubling the share price wouldn’t require $350bn of incremental investment, surely you accept that some significant new money would need to enter the buy side in order to shift the demand curve up?

    • Anonymous

      Very insightful! I’ve heard the “AAPL is too big” argument before, but never spelled out to reflect what a high P/E would require.

      One of the reasons I love AAPL stock is that we can expect it to grow steadily. I’m a boring buy and hold guy, so I don’t care much about the current volatility. As long as it is undervalued by traditional metrics, I feel comfortable that the broader market cannot hold it down. A banking crisis can’t erase their $76B in cash or remove demand for their superior products. At its current size, I have no delusions about a future return to the 35x valuations of yesteryear. But despite its size, I can’t see a scenario where P/E can be compressed much further. New money is always entering the market, and at a certain point the valuation starts to but up against that of obviously inferior investments, even within the same sectors. As this happens, I feel like money will necessarily migrate towards AAPL to chase the consistent earnings beats. This new money should be enough to keep P/E from falling even further.

      I know it’s been beaten to death on this forum and many others, but Apple still has the option to return significant cash to shareholders in the future. Even without depleting the current balance, Apple can pay a dividend in line with the utilities and telecoms. This would achieve two goals: first, it would keep the market cap correlated to enterprise value. Right now, there is a growing gulf between the two that I believe is an anchor dragging AAPL stock a bit. The second benefit of dividends would be the inclusion of AAPL in many mutual and index funds that mandate income for shareholders. A whole new class of investor would flood into the name and give a boost. At the least, it would allow current shareholders to reinvest earnings – this alone should push up the price a bit.

      • davel

        See the link above to the SF Fed Reserve. Interesting study correlating PE with baby boomers age.

      • Chandra2

        >it would keep the market cap correlated to enterprise value. Right now,
        >there is a growing gulf between the two that I believe is an anchor dragging
        >AAPL stock a bit.

        Joe: I have read such a thing elsewhere too. Why is that gulf bad? EV is just a term and by definition the gulf is going to widen if the cash increases. So the question is back to ‘Why is holding cash bad?’. If holding cash is bad, is holding debt good? That is so counter intuitive. On the other hand, I hear people’s argument that Ex-cash Apple’s next year P/E is close to 10 or 11 and so it is cheap. There they are using the enterprise value gulf as a positive.

      • Anonymous

        I’ll give the standardized test analogy

        EV : P/E (ex Cash) :: Market Cap : P/E

        By accounting for a company’s cash reserves (or net debt), EV allows for a more honest evaluation of how shareholders value a company. A debt-laden business obviously trades at a higher multiple ex Cash than is implied by simple P/E. The opposite is true of AAPL.

        It’s anecdotal, but I think that the cash is a drag on share price when it is such a large percentage of the total market cap. As fast as the company is growing its top and bottom lines, the share prices should theoretically be moving up much faster than they have been. But investors tend to ignore cash flow if the cash never goes anywhere. AAPL is a cash generating machine, but they don’t reinvest for additional future growth and they don’t return the money to shareholders. Equity investors don’t appreciate the optionality value of $100B vs. $30B; at a certain point, the cash just represents a weight that has to be moved to raise market cap. I believe that the ex cash valuation is very easy to measure but very hard to improve.

        Here are two couple of companies that get credit with investors for their use of cash:

        Autonation – the car dealership company has taken share buybacks to a new extreme. Over the last several years, the company has decreased its float from some 550 million shares to 100 million shares. They have performed well in their business over this window, and the average cost of the buybacks is a fraction of today’s price. In fact, it’s easy to argue that the price is necessarily higher today as a direct result of the buybacks. They didn’t merely use cash to offset executive options and prevent dilution; rather they actually concentrated the value of a single share. With such a radically smaller float, each remaining share represents a bigger slice of the company

        American Tower – the cell tower company does not issue a dividend and does not buy back shares, but they heavily reinvest their free cash on new infrastructure which will generate additional predictable growth. By investing money quickly, AMT has managed to keep earnings low while growing the value of the business. As a real estate business, future income is in direct correlation with asset volume. Shareholders reward AMT with a P/E of 56 because they understand exactly what the company is doing.

        I’m not proposing that Apple should pursue either of these paths; in fact I think either would be foolish for a company with their profile. But absent an extreme cash strategy to bolster shares, I think Apple should start to level off its balance when some target number is hit (perhaps $100B). The easiest method is a dividend, which would likely have a dual positive effect – immediate price appreciation and future income stream.

        Investors can accurately value the cash when it goes into their own pockets, but struggle when it just sits in company coffers.

    • Sacto Joe

      “Put another way, in order for Apple to show a 2007 P/E today, investors would need to be willing to dump $700B into the stock.”

      Yep. And they should! Because if they don’t, the present imbalance gets worse. It’s not hard to estimate where Apple will be in five years if its EPS keeps growing like it. Assume only 50%: It’ll be pretty close to 30 this fiscal year. That means the 2012 fiscal earnings will be 45, the 2013 earnings will be 57.5, etcetera. By this reckoning, Apple will be earning $194 a share by 2016. Even at a miserable P/E ratio of 10, that equates to a price per share of $1,940!!!

      The only way the market has to keep a balance between earnings and share price is to reward more successful companies with a higher P/E. But Apple is earning SO much money SO quickly that the market simply can’t keep up! THAT’S what’s driving the P/E down!

      And that’s why the article earlier this week comparing Apple’s P/E with other “comparable” companies’ P/Ef and saying it was in-line was totally bogus. NOBODY is earning like Apple’s earning!

      People have been saying that Apple is a giant company that’s acting like a start-up. The problem is, investors usually reward a start-up since they often have earnings that grow like Topsy. But Apple needs VAST sums to stay on top of its future earnings potential. To the degree that that fails to happen, it is not because Apple is a “high risk” company, but because it is, quite literally too successful for people to countenance!

      Right now, as you’ve pointed out (sort of!), Apple should be at $900-$1000/share. It should then maintain a high P/E (at least 30) until some signs of earnings leveling occurs. Then, and only then, should the P/E start dropping down to the levels of a Microsoft or a Dell!

      That is literally the only way Apple’s P/E is going to avoid a total and complete nose-dive.

  • Anonymous

    Instead of P/E, we should determine Apple’s growth potential with E/U: Ease of Use.

    The more you improve the ease of use of a computing product, the more potential users you will have, and the more potential sales you can make. That is because almost all computing products are too hard for most of humanity to use. Most people are outside of the computing community looking for a way in. Then something happens like the text-mode Internet changing to the World Wide Web, and suddenly you have huge growth in Internet users. Or Windows v3.11 changing to Windows 95, the most dramatic improvement in ease of use ever in the history of Windows by far, and the most dramatic improvement in user base by far. Or something happens like Mac OS X to iOS, again dramatic improvement in ease of use and only 4 years later, iOS dwarfs Mac OS X. iPod is a study in taking over a market through ease of use. A Creative Nomad from 2000 could not have become a mainstream device like iPod; it was just not easy enough to use.

    At some point in the purchasing decision, the potential user says, “that is something I could USE.” They are a USER, after all. If they can’t say that to themselves, they cannot buy. If they cannot consume it, they cannot be a consumer of it. They are outside of the light cone of that product. People are talking about how little kids and grandmas are using iPads. That is PC market growth through ease of use. The iPad brought those people into the PC market.

    So then we see Windows 8 Explorer this past week, and it did not look like something I could use. And I am an advanced computer user. They did not improve ease of use significantly, certainly not enough to even warrant changing this antique interface at all. Apple solved that problem in iOS by simply leaving Finder out. They could have easily had an app, “Finder” on iPhone where you navigated the file system, and it would have been a lot like Air Sharing looks, it is no mystery how to build an iOS interface for browsing files. But about 98% of humanity cannot work productively in a computer file system. And the other 2% are finding it to be tougher and tougher as their digital universe grows. If you want to grow the user base then you will have to solve that whole problem like Apple did in iOS, not make it a little better so that 97.9% of humanity can now work productively in the file system thanks to Windows 8. And even on Mac OS X, we see the “Library” concept minimizing the need to go into the file system for years now, and we see apps now auto saving versions and restoring window states, so that users are able to go into the app where they did some work to access documents, not have to hunt for them in a file system.

    And this also applies to other areas of computing. Ease of use will give you growth. PHP did not succeed because it is pretty, that’s for sure. It is much easier to use than previous solutions and opened up back-end scripting to developers who previously were left out.

    Even now, if you pluck a random person out of the world population, there is likely very, very little computing technology that is accessible to them. Computers are still way, way too hard to use. So there is huge headroom in computing as far as adding ease of use, and huge headroom in the potential for growth.

    • Chandra2

      >Even now, if you pluck a random person out of the world population, there is likely very,
      > very little computing technology that is accessible to them. Computers are still way, way
      > too hard to use

      There is an affordability component to the above, but if you restrict it to those who can afford to buy computing technology but still do not use one, then the ease of use has a part to play.

  • ChampagneBob

    Even a modest share buy back program of 5 billion would ignite share price upward and lessen the impact on the weighted indexes with fewer shares outstanding…..

  • Anonymous

    Going back to Sharpe (’54, IIRC) and Rosenberg, B. and Marathe (’73), serious researchers have looked at factors affecting the market. Barr Rosenberg’s work is now the basis for most equity risk work in the US, has 68 factors in the recent MSCI formulation. (nb: Bloomberg’s index was done by a different, and unrelated Mr. Rosenberg, IIRC.)

    Nobody should have the least doubt that risks in the world’s financial sectors are a major issue. But the BBerg index, while not back to rosy, is nowhere near the depths it was in ’09; meanwhile many other risks, long known to investors, remain: economic growth; competition within and between countries; distribution of income between rich and poor, etc.

    In any case, perceptions and objective likelihood of crises can vary wildly. The US financial crisis resulted in one rating agency dropping the US one tiny notch out of ~ a dozen and customers still buy US IOUs with invisible interest rates; contrast that to the political rhetoric. Meanwhile, the Greek government is likely to default — to be able to pay off the bonds it wrote — within a week or two, and the average citizen thinks the Germans are trying to make off with the Parthenon by asking for collateral on further borrowing that is needed to pay off the LAST IOUs.

    Let’s not use this modest statistical exercise on stock prices to overlook the fundamental business issues with Apple, new competition evolving from unexpected sources, and the sharp challenges to the other major smartphone software vendor (the Baidu Yi OS and others that will be inspired by it).

  • Anonymous

    Going back to Sharpe (’54, IIRC) and Rosenberg, B. and Marathe (’73), serious researchers have looked at factors affecting the market. Barr Rosenberg’s work is now the basis for most equity risk work in the US, has 68 factors in the recent MSCI formulation. (nb: Bloomberg’s index was done by a different, and unrelated Mr. Rosenberg, IIRC.)

    Nobody should have the least doubt that risks in the world’s financial sectors are a major issue. But the BBerg index, while not back to rosy, is nowhere near the depths it was in ’09; meanwhile many other risks, long known to investors, remain: economic growth; competition within and between countries; distribution of income between rich and poor, etc.

    In any case, perceptions and objective likelihood of crises can vary wildly. The US financial crisis resulted in one rating agency dropping the US one tiny notch out of ~ a dozen and customers still buy US IOUs with invisible interest rates; contrast that to the political rhetoric. Meanwhile, the Greek government is likely to default — to be able to pay off the bonds it wrote — within a week or two, and the average citizen thinks the Germans are trying to make off with the Parthenon by asking for collateral on further borrowing that is needed to pay off the LAST IOUs.

    Let’s not use this modest statistical exercise on stock prices to overlook the fundamental business issues with Apple, new competition evolving from unexpected sources, and the sharp challenges to the other major smartphone software vendor (the Baidu Yi OS and others that will be inspired by it).

    • MOD

      Apple Market Cap is $357 billion. Greek debt is Euro 328 = $469 billion. It could ostensibly cover all of the Greek debt, what with the profits it makes. Are there any serious researchers looking at this factor?

      By writing of the risks inherent in a market you are not doing anyone anymore favors than by writing of the opportunity losses of not participating in that market.

      There is a joke of economists having lunch who see a $20 bill on the ground but nobody picks it up because they convince themselves that it is an illusion. If it were real, someone else (a market participant) would have picked it up before they got there.

      Likewise with Apple. If it were such a good investment someone else would have invested in it and the price would already be much higher. Therefore the fact that the price is not higher means it is not a good investment. This is classic PE ratio theory, believe it or not. They attribute the “market” intelligence and wisdom. Only independent thinkers like Buffet ignore the market and buy solely on fundamentals.

      Yet the market usually comes around and sees his point of view, that the business really is undervalued. Bu then, he makes a killing. So how is Buffet able to see something that the “market” cannot? He looks at the fundamentals, not at the market. People in the market look at the market, but that is like looking at yourself in the mirror. It has nothing to do with what Apple is doing.

  • David

    Perhaps the decrease in P/E is due primarily to the shift in ownership of Apple shares. Apple users and fans had a greater portion of the shares in the past than they do now, since a greater fraction are now owned by large funds.

    The current price per share is determined to a greater degree by the worldview of the large fund managers than by the worldview of individual shareholders, and they have a more limited imagination.

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