“Even after its current run-up to around $95/share, Apple’s trailing price/earnings ratio of 15.3 is much lower than the overall S&P 500 P/E of 19.4,” Gregg Rosenberg writes for Seeking Alpha. “Its valuation is roughly in line with ‘peers’ if you include in that group many troubled companies seeking a strategy, such as HP, Microsoft, Cisco, and Intel. However, unlike these “peers,” Apple shows no obvious signs of being a company in a shrinking market, or unable to execute or without a strategy.”
“Apple’s fundamentals are all measurably better than those of the average S&P 500 company. Its present profitability, brand strength, balance sheet, management and ability to execute are all observably first-class, and it has maintained these characteristics consistently for fifteen years,” Rosenberg writes. “Reviewing its recent price history, one can only conclude that market participants have been applying a severe risk discount to Apple relative to the average S&P 500 company. To understand how Apple’s price compares to its fair value, then, we need a risk-based valuation model.”
“When all aspects are fully priced in, we can see that even now at about $95-$96/share, it is priced with a sizable margin of safety for value investors and is far below fair value of $131/share,” Rosenberg writes. “I have to remark that the current market is a risk-on, aggressive investors’ market, with few companies priced at a fair value level. For Apple’s share price to reflect the same risk/reward posture towards Apple as market participants currently take to other companies with similar low risk/high reward profiles, its shares should be selling closer to $190 than $90.”
Much more in the full article here.
For most companies, the overall market can be considered “infinite.” That is, investment in a particular stock is assumed to NOT have direct impact on the price of other stocks. In other words, the total supply of money available for stock market investment is not considered, when making statements like AAPL “should be selling closer to $190 than $90.”
But for Apple, already the most valuable publicly traded company in the world, these are valid considerations. AAPL investment already totals to a significant percentage of NASDAQ’s total market value. At some point (if not already), new investment in AAPL will make AAPL go up at the expense of other stocks, because the money invested in AAPL will come more from “uninvesting” in other stocks. And then, AAPL will face a different type of resistance to upward movement. And if AAPL remains successful, other companies will face new pressure for downward stock movement not based on their own results.
The stock market isn’t a zero sum game. When stocks aren’t performing well, the money flows into real estate. When real estate sucks, the money flows back into the stock market or whatever.
Plus, think of people who only buy AAPL and nothing else, like their employees. Most of whom would never buy stock in any other companies.
That may be true to a certain extent, but existing investments (whether they are in stocks, real estate, or commodities) are not liquid. The investor has to make a conscious decision to sell it and buy something else, and that would be particularly difficult (cause of “resistance”) for something like real estate.
Apple’s current market cap is around $570 billion. That means that if (as suggested by the author), AAPL “should be selling closer to $190,” ANOTHER $570 billion would need to be invested in Apple.
About 15 years ago, AAPL was trading at a split-adjusted $5 (or lower), and Apple’s market cap was less than $10 billion. That means, for AAPL to double in price, it only took another $10 billion in additional investment. Collectively, such funds are easily attainable; the “rest of the market” (and you can include other forms of investment) can be considered “infinite” in comparison, so the effect of AAPL doubling in price was negligible for the overall market.
Today, Apple has grown to a point where it takes an additional $570 billion in investment for AAPL to double from $95 to $190. Where does that money come from…? To a much greater degree, a LARGE number of investors will have to sell other stocks (or real estate, or gold, etc.) to buy AAPL, to collectively come up with $570 billion. And THAT will cause resistance to AAPL’s upward movement, more and more, as AAPL goes higher and higher. Just using a factor like P/E to predict AAPL price is naive.
To HELL with the numbers Apple is DOOMED !! ! iTell Ya! Those people say So! see. Pf
SamDung… The Doody Of Red Fox In His Junkyard. S5 My Ass.
For those more financial market oriented, historically what has been the S&P 500 P/E? 19.4 seems low to me.
You don’t have to be “financial market oriented,” you just have to use google. It leads me to http://www.multpl.com, which says of the S&P 500 P/E:
Current: 19.62
Mean: 15.52
Median: 14.56
Min: 5.31 (Dec 1917)
Max: 123.79 (May 2009)
So yes, it’s high now, but not insanely so.
The share price isn’t higher because it is the most valuable company in the world. That means it’s only move is downward. It is also tech. Investors never think a life/changing invention is going to happen every few years. As the song from “Oklahoma” says “they’ve gone about as fer as they can go!” That’s why Apple’s share price isn’t higher.
Everything Is Up-To-Date In Kansas City.
That is ridiculous. Just knowing that they are the most valuable company in the world when their products hold only about 12 to 15% of the each market means there is that market share to gain, let alone all new markets with all new products.
The new interest in enterprise is finally making AAPL very interesting.
One easy example would be if Apple fiercely went into Search with an advertising platform, Google stock would plummet 60% just because they finally have a competitor.
I feel that would be the easiest most obvious profit making market for Apple to enter.
I’m sure they’ve thought about it! But given their laudable perfectionism (and the Maps fiasco) they won’t challenge Google again without knowing for sure they have something obviously better to offer. Their successful strategy is always about full market disruption — shock and awe — not about competing where there might be room.
Wall Street will continue to bet against Apple while happily going all in on Google. It’s really hard to understand. Apple could easily steal search engine market share from Google if it really wanted to. It would be far harder for Google to become a hardware company unless it acquired one and made it its own and they still wouldn’t be able to build the retail stores that Apple already has.
Apple only needs to build a search engine or acquire one and put it on all its mobile hardware. Every iPhone and iPad could have Apple’s search engine by default within a month’s time and all that revenue Google was getting from users on Apple’s hardware would be gone.
Why Wall Street see Apple as being weaker than Google I’m not really sure. Is it possible that it considers Google’s profits easier to get? It would seem as though Google’s revenue could be cut just by having a little more competition in the search engine space. Wall Street has price targets of $700 a share for Google and only $110 for Apple. Google is being given that much more upside so easily. I’m certain Apple is going to absolutely crush iPhone 6 sales and yet the company is being low-balled as usual. It’s really frustrating how Google is being classified as invulnerable and Apple is portrayed like a 97 lb. weakling vulnerable to stiff winds.
Just creating a search engine, or buying one for that matter, doesn’t add value. Even if it hurts Google Apple would only add to their market capitalization by monetizing the search engine. I for one prefer to pay for what I buy and not be traded as a commodity by the companies that hope to sell me something else to folks who make crap I have no interesting in buying.
I’ll pay for my hardware and software without regrets and hope this model remains a choice. Open source or commercial is fine by me but ad supported is a model I wish privacy laws had the ability to crush.