Andy Zaky at Bullish Cross has a great post on Apple’s valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple’s earnings today, compared to just two years ago. Back then, it was worth $32; now, it’s worth just $13. In the eyes of the market, Apple earnings are worth less than those of Cisco, Comcast, IBM, or AT&T, and are worth just 13% of the earnings of Amazon.
All of which raises the obvious question: why is Apple trading at such a seemingly depressed level? I have a few ideas, none of which are particularly compelling.
Estimates are up 12% over the past 90 days for the first quarter of 2012, and they’re up 7.5% over the past 90 days for the full year. This also helps explain the compression in forward p/e ratios.
What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers.
One possibility is that all the others you cite are overvalued.
This doesn’t seem all that surprising. Where is the long-term growth going to come from? Are they going to just continually innovate new platforms at ever-higher price points forever? Or will their massive iPhone and iPad profits be hampered by disruptive competition from Android and Windows phones and Amazon-style tablets (not to mention market saturation)?
Today is the best of all possible worlds for Apple and it makes no sense to price in an indefinite continuation of current conditions.
Also, the comparisons listed (Cisco, IBM, etc.) are not necessarily good comparisons, for all they have in common is that they are in the Info Tech and Telecom area with varying risk factors, growth rates, etc.
Then there’s the harder to quantify aspects of each company – management, products, marketing, etc. – with varying levels of value.
Last point: as for the technical analysis “astrology” you cite, there is some justification for skepticism re the discipline but I would not rule out all aspects of technical analysis. After all, while the markets are not completely efficient, they do possess within them valuable data via price and price movement (MACD and Relative Strength) that have been proven to a useful predictive value and, therefore, increase the odds (not to 100%) of forecasting future market action.
From a fundamentals perspective, you need to look not only at the 2012 and 2013 earnings, but also at the certainty with which they will be able to hit/exceed those earnings going forward.
Two reasons I am reluctant to invest in Apple: (1) No dividend and (apparently?) no intention of ever issuing one. This is the corporate equivalent of a bubble, destined to inflate rapidly until it pops and entirely self-destructs.
(2) I have no clue how much they will be making in 2015. Over the past half-dozen years they have introduced the iPod, iTunes, iPhone, and iPad. As long as they continue to produce hit consumer devices, they will continue to be very profitable. But the life cycle of hit electronics is pretty short. Three years ago, Blackberry-maker RIM was trading at 100-150 and everybody wanted one. Now you can have them for $17. Is there any fundamental difference between RIM and Apple? Or is it simply execution?
I think your points 2 and 4 point to the reason, which is simply that the stock market is a fiction composed of other fictions, and AAPL forces some of the fictions into conflict with each other. Specifically, the following fictions:
– prices represent, at some manageable level of distortion/indirection, what things are worth – the stock market represents, at some manageable level of distortion/indirection, the economy – the prices of individual stocks represent, at some manageable level of distortion/indirection, what those companies are “worth” – you can use understandable metrics to relate stocks to each other and the market as a whole
But when we consider the market capitalizations of Apple and Exxon-Mobil, something has to give. It is simply insane to suggest that nice mobile phones are worth as much as oil.
WRT point 5: the opposite is actually the case. Apple is going to sell iPhones as fast as it can make them at the current margins for several years. See http://www.asymco.com/2011/11/28/how-man y-ios-devices-will-be-sold-in-2012/ for three independent estimation mechanisms which reach this conclusion. So the conflict between its results and the fictions of the stock market will only be heightened over the next couple years.
“And the high share price sends a message to bigger investors, too: it says that Apple isn't in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks.”
Or even stock splits, which would not be dilutive.
Otoh, what’s the price of GOOG these days?
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