After the market closed last Thursday, Apple announced quarterly earnings per share of $1.26, slightly higher than the median forecast and higher than earnings for this quarter last year. Yet, Apple’s stock price plummeted. Let’s take a longer-run perspective.
In theory, the intrinsic value of a stock is equal to the present value of the future income it generates, which might be measured by dividends, dividends plus share repurchases, earnings, free cash flow, economic value added, or some other appealing metric. Because the future is unknown, analysts often use the most recent observed values of dividends, earnings, and so on, with the ratio of the stock’s price to this income measure providing a rough valuation metric. For examples, dividend yields and price-earnings ratios are familiar valuation barometers.
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