“The reason we look at valuation is that it offers insight into how innovation is perceived,” Horace Dediu and Dirk Schmidt write for Asymco. ” If a company is a successful innovator it usually creates vast wealth for its owners. However, the timing of that wealth creation depends greatly on its recognition by others.”
“So with that in mind we like to compare industry and innovation analysis with what ‘the market’ thinks about Apple,” Dediu and Schmidt write. “The latest method we had in mind was to compare P/E (a measure of valuation) and Growth. We’ve shown before that they seem to be moving in different directions. That’s not been news for over a year. What we will try to do now is to see if there is discernible change in the relationship before and after the financial crisis.”
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Dediu and Schmidt write, “In the case of Apple, average growth actually increased slightly between the two sampling periods (from 68% to 71%) while the average P/E dropped from 32.8 to 17.5.”
Read more in the full article here.
[Thanks to MacDailyNews Reader “Dan K.” for the heads up.]
Is it just me or does no one else understand this?
When you buy a stock, you should consider how much you are paying for a dollar of earning today. All other things being equal, the price/earnings (P/E) ratio should reflect the growth rate of the company, as appropriate for that industry. In theory, it all fits together very nicely – higher earnings, higher price for a constant P/E. AAPL has not been behaving in that manner – the P/E multiple has dropped by roughly a factor of two or three since late 2007 even as the company continues to grow at a prodigious rate.
There is another factor to consider – the sustainability of that growth. You don’t want to pay a premium for today’s earnings if the growth rate might suddenly tail off, thus reducing future earnings expectations. My belief is that many of the big investors cannot bring themselves to believe that Apple can continue growing so fast, and that believe keeps the stock price artificially depressed. Growth always has a limit and, eventually, Apple will saturate the worldwide market with iPhones, iPads, and iPods. In the absence of initiating new markets, growth would tail off as the business became more focused on replacements and upgrades than gaining new customers. With the market in China just opening up for Apple, however, I think that the Apple (and AAPL) growth trend still has some years to go.
That is really the problem here. Apple is coming up on 1 out of every 5 computers. I doubt that the market share is even that for the iPhone. The AppleTV hasn’t even started. And the iPad, while dominating the tablet market, has almost the same less than 20% of the world’s computer market. Again, 80% to grow into or take over. Yet, these idiots think that Apple has saturated all markets and there is nothing to consider as far as growth. What?
80% of the students in the universities are using MacBooks, everyone with half a brain wants to own and use an iPhone and iPad. If Apple gets half of the remaining 80% of all the markets with the same profit per unit, what will Apple look like? Apple could buy countries than set up there corporate office anywhere they want.
What will these ninnies think when Apple takes the next then the next market? What if Apple wants the robot and automation market soon? What if they develop iCloud AI? All those iOS devices would get a lot smarter (and scarier too). What if Apple wants the cable TV market next? They have the cash to buy any part of it they want too. Live on demand TV when you want it with everything on line at their iCloud.
This is Apple’s game and there are no growth limits because you do not know what market Apple will create or take over next!
Thanks for the insight king el but jersey trader is correct. This is all assuming that Apple has nothing new to offer. Just wait for the next big thing and the figures will be meaningless. Only Apple is going to where the puck is going to be.
You and Jersey Trader are both absolutely correct. I was just pointing out that Apple has a strong future based only upon its current product lines for years to come. Any new Apple product line that takes off boosts the company’s long term prospects. That is why I find it so foolish that many investors are willing to pay huge P/E multiples for riskier investments when Apple is a proven, profit-making machine with a great reputation, a history of sustained growth, no debt, and tens of billions in the cash and securities on hand to develop or take advantage of a wide range of opportunities.
If I had more money, I would buy more AAPL.
Good chatting with you!
Good points KingMel
There is a perception that Apple cannot continue to grow but then each quarter they defy the skeptics.
To be honest I would be scared if Apple management start saying that their growth is never going to end. That is a sure fire sign that they are resting on their laurels and the success rate is on the way down.
A third factor is that impact that hedge funds and shorts have on the stock price. When a considerable amount of shares is traded in that fashion then the chance is that stock price will migrate to the most profitable position for those groups.
Apple is a sure bet. They consistently beat expectations and come out with killer products every 3 years (iPod, iPhone, iPad). This provides incentive for using the stock for making money through hedge funds and shorts. The result is stock prices that discount value and ignores growth success.
The credit crunch may be another factor simply because the options for hedge and shorts were reduced by the instabliity of other companies and led them to focus on Apple.
The price for aapl is not tied to growth anymore but simply to the price that makes the most money for the brokers.
Please pardon the poor grammar. In a hurry…
Math being used to prove there is a bias against AAPL?
There is one other thing to consider. I believe that artificial manipulation can only last so long before the fundamentals overcome those constraints and AAPL takes a big leap. It wasn’t so long ago that AAPL dropped to $75 along with the rest of the market. But AAPL bounced back and made it over $400 for a little while, eventually settling in the mid- to upper-$300s. Strong results from the past quarter combined with a potential blockbuster holiday quarter fueled by the iPhone 5, MBA, iCloud, and whatever else Apple comes up with (an upgraded iPod touch, please?!) could break AAPL into a new upside trend. Eventually it will happen.