Apple’s incredible shrinking P/E ratio

“Perhaps the most succinct commentary on Leonid Kanopka’s naive claim that Apple (AAPL) is a ‘bubble ready to burst’ (see “A few fries short of a Happy Meal”) was Nicu Mihalache’s plaintive response: ‘Do you know what P/E is?'” Philip Elmer-DeWitt reports for Fortune.

“The price-to-earnings ratio, as every trader knows, is the simplest way to gauge how the market values a company. A high P/E — like the nearly 50 times earnings investors were paying for Apple four years ago — is a signal that the market has high hopes for a company,” P.E.D. explains. “A low P/E — like the current 10.05 forward earnings ratio — is a vote of no confidence.”

P.E.D. reports, “There are more sophisticated ways to value a company. Asymco’s Horace Dediu, who produced the chart above, favors P/E/tG (price to earnings to trailing growth). But his P/E chart, which shows Apple trading in a band between 35 and 45 times earnings between 2006 and most of 2008 and between 15 and 25 times earnings since 2008, tells you most of you need to know. In a piece posted Thursday entitled The Thermodynamics of Apple’s Share Price Dediu writes: ‘Note that the price has dropped outside the current band for the first time since the great recession. It is still below 15xE today. Perhaps a new band is forming.'”

P.E.D. asks “What’s going on?” in the full article here.


  1. The older the investor, the greater the disbelief. Those in the business for a long time just know that the high P/E is reserved for small-cap and mid-cap companies that have plenty of aggressive growth ahead of them. Large cap companies, especially the largest of them all, can’t possibly have aggressive growth ahead, no matter how much common sense (as well as careful analysis) tells them.

    Until those who buy and sell stocks for a living learn how to divorce themselves from such stereotypical thinking, AAPL will take its time before it begins to reflect its real value.

    1. The market is the market. The real value of AAPL is exactly what is sells for. That is the price people are willing to pay. If you think it is worth so much more, please buy some of my stock at that ‘real’ value. I will gladly sell as much as you are willing to buy from me.

      Try to understand how the market really works and quit trying to make the market fit your model.

      1. Nobody is disputing the real value. The interesting take-away here is that when a stock has the properties of BOTH an r&d growth company AND ALSO a large cap company, the market values that single entity as a large cap company without the growth component.

      2. Unfortunately, this is not a market that is rational but has been hijacked and manipulated by Wall Street. For 30 years Wall Street had been wrong about Apple’s direction, and Apple has confounded Wall Street’s by not following its advice and wisdom but still grew to become one of the most valuable company in the world. The companies who followed Wall Street’s guidance had been poorer for the experience.

        In fact, not only has Wall Street done a disservice to Apple but also to the economies of the US and the whole world, except China. Since China has been outside the ambit of Wall Street’s manipulation, it has been able to grow beyond anyone’s expectation. All the excesses committed by the Western economies had been done at the behest of Wall Street.

        1. Saying that the stock market has been “hijacked and manipulated by Wall Street” is a bit like saying Target has been “hijacked and manipulated” by Target employees…

      3. Oh, I get it now: The stock *itself* is the thing, not that it represents a share of ownership of a company! That’s an outmoded concept, right? Thanks for clearing that up for me, 3l3c7ro. In other words, the underlying value of the company that the “stock” is supposedly related to is ABSOLUTELY IRRELEVANT to the stock thingy’s value.

        Now that you’ve revealed the truth, I think it’s time to either rename the “stock market” or shut it down.

  2. A TOST analysis (+-PBAJ) towards BUN shows that it’s not as simple as the inverse relationship between company size and diminishing P/E. Investors need unexpected resurgence, they kind they had before, in order to inflate shares.

    Current high expectations are working against a high P/E, compounded by the death of SJ. Investors *need* lowered expectations (which they’re increasingly getting in a way that could be ultimately helpful), combined with *unexpected* growth, and assurance that AAPL can create magic w/o SJ in order to shock the P/E back up. Otherwise, LATTE curves (JAM & GIN) will continue to languish, at least for now.

    1. Since you seem to be very smart at valuing a company then please tell me why analysts are giving such high target prices for Apple. Why don’t they figure in the same factors that you’re doing and lower those target prices to around $410 or so? What’s with those $500 and $525 targets that you’re basically saying are unreachable in a year’s time? Why are those analysts misleading investors with inflated target prices? Wouldn’t that amount to knowingly committing fraud? They know that Steve Jobs has died and there probably isn’t any amazing and magical new product coming out of Cupertino any time soon. They should have lowered targets by at least $100 as soon as Steve Jobs died by your reckoning.

      I’m not questioning your reasoning, I merely don’t understand why there are so many vastly differing opinions about Apple share price growth potential when everyone is privy to the same information. i only know Apple’s share price is what it is because investors don’t want to pay more for it since they don’t believe Apple is worth any more than it is. That seems to make sense.

      1. Valuations of $525 make sense, they’re not misleading. However, life is more complicated, and there are countless more variable that the analysts, with the best of intentions, are not taking into account.

        For example, the death of SJ is not as simple as a single value deducted from the price of the stock. It impacts how investors view and buy the stock in a way that doesn’t reduce to a single number. Rather it’s a drag on the stock that the company has to overcome with continued success beyond his influence.

        Predicting the stock is like predicting the weather. There are likely thousands of subtle forces that influence stock. As the field advances, more of them will likely be taken into account.

  3. Apple’s success is based on it’s impressive sales growth of Mac, iPhones and iPads.
    If you believe that Apple will not be able to maintain its current sales rate, then revenue and profit will shrink. This appears to be when the market sentiment is.
    If you believe that the current sales rate will continue then the company will post similar numbers until the price starts to fall due to competition.
    If you believe that sales will continue to increase then revenue and profit will continue to skyrocket.

    I am in the last camp because Apple have plenty of growth potential in all areas. Macs are succeeding with consumer demand, iPhones are selling well and the carrier availability increasing. iPads have minimal competition and are the #1 choice this Xmas.
    Even ignoring potential products, Apple can easily growth using its current product line.
    Critics complain that Apple doesn’t have a 1000 products to smooth sales volatility. But what has been learnt from Jobs that it is better to focus on being best in a few products than mediocre on many. That is Apple’s strength and the market does not understand that.

  4. These idiots are very clueless. Yes, anyone with 2 brain cells knows that “Apple is now the most undervalued large cap stock on the S&P 500”. They may not know what Apple’s next “Just one more thing” is, but Apple is crushing everyone in their markets now with everything that they can’t make enough of.

    You can stand at the beach looking at the sea shells and keep telling yourself, “THAT IS NOT A TSUNAMI WAVE” for only so long. Then reality hits.

  5. Apple’s Forecast 12 Month Forward PEG Ratio is 0.52 today. 1.0 is properly priced. 0.52 is WHAT! Can I have more of this while the clueless idiots have this on sale.

    Apple will keep growing bigger and faster and more profitably with no debt and great innovation and these fools will no longer be able to hide their emotionally driven biases against Apple. Man, Steve died. He won. Your team lost. Get over it!

    1. The market is the market. The real value of AAPL is exactly what is sells for. That is the price people are willing to pay. If you think it is worth so much more, please buy some of my stock at that ‘real’ value. I will gladly sell as much as you are willing to buy from me.

      Try to understand how the market really works and quit trying to make the market fit your model.

      1. No how many times you say this it does not mean it is correct.

        Saying “The market is the market. Live with it.” does not take into account that Apple has a history of being a rolling stock. Various “analysts” are known to take advantage of that by putting out negative reports in order to augment any anticipated roll or, in some cases, just to get a roll going. If you are an adviser to various hedge funds (but legally independent from them) it is to the funds’ (and ultimately your) advantage to drive the stock down.

        Then when it goes up again (even moderately) put out stories that are based upon 100%, pure speculation (e.g., if Apple comes out with a TV it will be twice the price of at TV from anyone else). Get that next roll going early!

        And… if you think stock manipulation does not happen you are too naive to even be reading this board let alone any other one.

  6. I have no trust in a market whose only definition of success is increased growth. Not profit, not increased profit, but profit that has increased by a higher percentage than it had increased previously.

    It will get to the stage when these idiots will be using infinity as their measure of success.

    1. That really is a very poor definition of success in my eyes. There are so many easy ways to get increased growth at the expense of everything else. I’m suspecting these investors are hedge fund managers and they’re basically ruining companies and serious individual investors by betting on vague or impossible goals. When decent product quality no longer matters, there is really something wrong about that. It seems as though it’s cheating consumers to sell them substandard products if you can build better even at a higher cost. I guess I was just raised that way.

      When growing up I was never taught that increased growth was a company’s immediate goal. A company should build products that it’s proud of and that consumers will be happy with even if it cost more because higher-quality products cost more to produce. If the products are good enough, those that can afford them will buy them and those that can’t afford to will strive to buy them. I don’t understand how American values got so screwed up over the years.

Reader Feedback

This site uses Akismet to reduce spam. Learn how your comment data is processed.