“Here’s my October prediction: Apple’s P/E is going to get a lot smaller, even if the stock price goes up 10%,” Stephen Rosenman writes for Seeking Alpha.
“You can count on that sad prophesy. Apple’s PE is already an absurdly low 16 despite its booming business. Compare Amazon’s much higher 98 PE for far less growth,” Rosenman writes. “Even Yahoo’s valuation is higher!”
“How could the PE go any longer? After all, Apple’s growth story is intact,” Rosenman writes. “If the analysts even come close in their predictions, this fiscal year’s earnings are going to be up a whopping 80%. Yet, even sensational earnings won’t matter. The sad fact: It is virtually certain the company’s valuation will drop further.”
Rosenman writes, “If the analysts hit the number (a first), earnings would be up 83% year over year. If I’m on the mark, earnings practically doubled. All for a piddling PE less than 15, probably 13.7. Crazy, no?”
Read more in the full article here.
Sigh. Make them all just shut up.
amen.
What’s PE? No rude replies please.
Agreed. Can someone explain what the argument is and why it is a good and/or bad thing (according to the writer’s opinion)
It’s known as the Price/Earnings Ratio. Basically, it’s a function of the stock price as well as the earnings. So, if Apple’s P/E is about to experience a drop, that means that P (meaning the price) and E (the earnings) might be in equilibrium (meaning 0). That could be pretty catastrophic if it happens, but I don’t know if that will be the case or not.
While this explanation is correct at the beginning, it falls apart at the end. P/E is Price of stock divided earnings. In Apple’s case, that number is getting lower and lower each quarter because the earnings are increasing so rapidly.
An historic P/E for a growth company that an investor would feel comfortable with would be 20-30. The author points out that the current P/E is 16 and will be closer to 14 after this quarter because Apple’s earning will be so high per share this quarter.
The lower the P/E for Apple, with it’s growth rate and earnings rate, the more undervalued the company is. It is a screaming BUY, but the market is in such dire straits due to Euro debt crisis, that that stock may not run up in price like it should.
It has nothing to do with dividends.
He said nothing about dividends. I believe he way trying to say “Price of stock divided BY earnings.”
First of all a ratio will not go to zero. If it’s in equilibrium the P/E would be 1, not 0.
Secondly a low P/E in and of itself is not a bad thing. In fact a low P/E is typically a sign of stability to a lot of mature small-growth companies.
The real problem is how do you get to a lower P/E ratio. There are two ways.
1) lower the P , the stock price (which is bad)
2) raise the E, the earnings (which is good)
Clearly they are speaking of a situation in which Apple’s earnings shoot way up, thus lowering the P/E ratio due to the stock price not seeing gains reflective of increased earnings. This isn’t a ‘catastrophic’ situation fundamentally, unless the market for AAPL never responds to Apple’s continued growth.
In other words the market isn’t rewarding Apple for their success the way it normally would.
Good explanation. Let me just add… a low P/E is a great thing. It means the stock is undervalued and when the stock market is in the mood to buy something AAPL, with it’s low P/E, will stand out as a great stock to buy.
A high P/E ratio means to smart investors that there is a risk in buying a stock since most investors consider a stock with a low P/E to be more desireable to own, regardless of industry. The P/E ratio is a guide as to whether to buy a stock or not.
P/E is just a guide to help investors determine what should be paid for a stock. Not a predictor of future performance of a company or it’s products nor the fiscal health of the company.
It is the ratio of the stock price (what someone is willing to pay for a share of stock) and the company’s earnings. The earnings are about health or size of the company, the P/E ratio is just a guide for investors to use to help them determine whether to buy or sell a stock.
hmmm…. was I too redundant?
And exactly why wouldn’t Apple be rewarded normally? Are they achieving success in a way that they shouldn’t? Exactly who decides the way a company should be successful? Should Apple have more debt or just less reserve cash? Lack of a dividend upsetting investors? Surely, selling every device a company makes and keeping consumers ecstatically happy is a form of success that should please everyone. Let’s just say that I fail to understand the terms of “success” since I suppose the definition isn’t set in stone on Wall Street.
And there’s no reason that Wall Street ever has to respond to Apple’s continued growth if things continue exactly the way they are. I’m not blaming Apple for anything because they’re doing what a good company should do and that’s building and selling products of quality and running a business as they see fit and not as Wall Street’s puppet.
I think it’s a testament to Apple being such a unique non-standard company. They really are hard for average investors to understand.
I think it’s also because you rarely see 30 year old companies demonstrate the radical growth that Apple has over the last few years. That sort of growth is usually reserved for start-ups and younger companies. Again, the market doesn’t know how to handle it. They keep thinking it’s some sort of fluke.
I cannot recall one major company in history that was growing at 83% in revenues as it passed the 100 billion dollar mark.
100 Million, easy, that list is a mile long, But someone name for me a company growing over say even 40-50% as it passed the 100 Billion mark.
@theloniousMac
P/E means Pablo & Eddie. They were two famous Mexicans that nobody ever heard of. This is not a rude reply, I have no idea what P/E means either, so I think you ask a good question.
http://www.investopedia.com/terms/p/price-earningsratio.asp#axzz1Z4U1Z0h9
PE = Price-Earnings ratio. It’s just a handy metric.
Market capitalization is supposed to reflect the discounted value of a company’s future cash flows, but that’s far too complicated, so people use PE as a quick metric.
Typically, a company that is growing earnings fast, gets a higher PE ratio, above the market average of 15. Apple has historically been around 30, because it’s a fast grower. Companies like Netflix and Amazon have been as high as 100. Microsoft back in 2000 when it was the most valuable company in the world had a PE of around 65. Now, slow growers with small profits, or constrained profitability, like electric utilities have low PEs, often below 10. The fact is, Apple’s current PE is about 15.8, but when you back out cash, their PE is in the range of 11. Because the PE is so low, lower than the market average, many consider Apple seriously undervalued and are trying to figure out why. By all measures, Apple is growing faster than Amazon, but Amazon gets a PE of 100, and Apple, 15.8.
This article is just stating that the stock price, will not keep pace with Apple’s earnings growth this next month. It hasn’t for the last 2 years, as the PE has kept dropping. Rosenman is not negative on Apple, he’s just pointing out that the market is still just as confused as before.
PE = Price / Earnings. It’s a guide to how much shares cost relative to the annual earnings.
What we should be concerned about is brokers manipulating the markets. JP Morgan state that they heard a rumor that Apple have reduced their iPad production by 25%. The result is a 3% drop in share price. Nice little earner for those set up to take advantage.
thats what these fools do.. They plaster rumors and unsubstantiated “facts” to manipulate the stock price…it’s nearly criminal in my mind…
To me, that just means that each share is undervalued, compared to rest of the market. I would rather own an undervalued stock than an overvaled one.
That is a request for Foxconn to reduce its China facility by 25% as the Brazilian production line starts up.
Also, did you notice that the report said iPads in one sentence and tablets in general in another? Perhaps it’s actualy a reduction in ‘other’ tablets that would account for the disparity?
Remember the good old days when PE was what the High School kids called recess?
It honestly had to happen. Wall Street is not going to sit back and just let Apple’s share price rise to the price targets some analysts are predicting. The market is being totally rigged with Apple being punished for growing revenue at the rate it is. You watch Amazon’s P/E keep expanding and you’re likely to see it at the 120 level by the end of the year unless Amazon’s quarter numbers are really below par. There is absolutely no valid reason for Apple’s P/E to shrink so far below historical levels. What would be the point of a company increasing revenue to see no share value increase? Does that make any sense at all? Especially with all that reserve cash and no debt.
Someone is saying that they’d rather own an undervalued stock but that isn’t quite the way it should be. A stock should be valued fairly when compared to similar stocks. Of course, Apple doesn’t really have any peers, but I’d want to know the exact reason why they continue to compress Apple’s P/E from historical levels. What exactly has changed Apple’s value? If anything, it should have improved and not declined.
If Apple’s share price today was caused by an unconfirmed source driving the price down, then Apple’s investors are rather gutless. iPad demand is about as hot as a product can get and if demand for the iPad falls then the whole tech industry sector should be down. With Amazon introducing a tablet soon, softening tablet sales, in theory, should also affect Amazon’s tablet sales. Except Amazon’s share price got a nice healthy boost (maybe from the streaming contract) but its tablet sales would also likely be depressed. Well, Amazon is working in its own little Wall Street-protected bubble that Apple isn’t privy to.
Here’s a nice little article that might start your stomachs gnawing at why Amazon is getting a relatively free pass by Wall Street:
http://www.gurufocus.com/news/145911/price-to-sales-and-operating-margins-aapl-and-amzn
Market Value per Share
——————–
Earnings per Share (EPS)
@macromancer above provided a link to a page describing P/E. Here it is again before I comment:
Price-Earnings Ratio – P/E Ratio
Quoting from this Investopedia:
“It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.”
IOW: Comparing the P/E of Apple (a hardware and accompanying software company) to Amazon and Yahoo is ABSURD and POINTLESS.
Furthermore:
“It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.”
IOW: P/E is not necessarily reliable and should NEVER be considered alone as meaningful.
I.E.: This SeekingAlpha article is mere filler to post on a slow day. Invest in Amazon and Yahoo over Apple at your peril. 😯
another thing to note is that p/e ratios are absurly high all over the market since the tech bubble of 2000. none of it appears rational at all and is probably simply fueled by far to much money chasing far too many opportunities.
regardless, high p/e should also indicate investors having already priced in future profitability. apples recent stellar performances could easily be short lived. almost all of it is based on their genius at creating new markets for the iphone, ipod and ipad where no market had existed and grabbing instant market share. but the wolves of competition have arrived. samsung is kicking apple in the nuts in the smart phone market. there is a bevy of new tablets on the market.
gee, sorry… i meant “far too much money chasing far too FEW opportunities”.