$AAPL Rally Continues with 2.9% Gain

| Apple Stock Watch

$AAPLShares in Apple Inc. continued to rally on Tuesday, ending the day at US$533.90 per share, a gain of $15.07 (+2.90 percent), on moderately light volume of 22.3 million shares trading hands. The stock has risen 4.7 percent so far this week, having hit a multi-month closing low on Friday of $509.794.

Barclays analyst Ben Reitzes issued a research note to his clients on Tuesday arguing that Apple's multiple is at an inflection point. He said that investors are asking themselves two questions, "Is Apple comparable to Nokia and Research in Motion and set for declining phone sales? Or is Apple experiencing a near-term correction before it innovates again not unlike what we have seen over the past few years at major web services companies, like Google, Amazon and others."

He argued that that if Apple is a true leader in software and services, it will "rise to the current challenge." If, on the other hand, internal issues at Apple—such as Maps, bugs in iCloud, and lack of a subscription services—cause it to lose market share, Apple's multiple is merely being corrected.

To explain that, $AAPL's current price to earnings ratio, also sometimes referred to as a multiple, is 11.7 That's a very, very low multiple for a growing tech company, but it's towards the high side for a company not expected to do much growing.

Another way of looking at it is that Apple is currently trading at 7.7x Barclays's fiscal 2013 earnings estimates excluding cash. According to Mr. Reitzes, that's roughly, "in-line with consumer electronic companies facing increased competition and margin pressure."

For some context, Amazon closed with a P/E of 3,392.94 (that's not a misprint), Microsoft's P/E is 14.6, Intel's is 8.6, and Google's is 22.58.

Mr. Reitzes said that it could take new products or other overt signs of innovation at Apple to re-spark investor interest in Apple. He said he'd like to see improvements to Siri and iCloud, and that he wouldn't be surprised to see Apple's TV plans emerge in 2013.

"The key for Apple in 2013 is to convince investors it can transform into a more reliable web- and cloud-based service provider to compete effectively with Google and Amazon – then the multiple could potentially re-expand," he wrote.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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3 Comments

geoduck

  Another way of looking at it is that Apple is currently trading at 7.7x Barclays’s fiscal 2013 earnings estimates excluding cash. ... For some context, Amazon closed with a P/E of 3,392.94 (that’s not a misprint), Microsoft’s P/E is 14.6, Intel’s is 8.6, and Google’s is 22.58.

For the non-investor geeks among us, is a high number better or a low number?

Bryan Chaffin

Good question, geoduck:  A high P/E represents investor belief that future profits will be higher than they are today. A low P/E means that investors believe a company will have less future growth.

To put it another way, AMZN investors currently believe that Amazon is worth 3,392 times 2012 earnings. That’s not hard, because Amazon doesn’t make much of a profit. In other words, investors are banking that at some point Amazon is going to turn all of those sales into something resembling profit, and do so with a vengeance. A P/E that high represents enormous risk on the part of the investor.

Intel’s P/E is low because it participates in mature markets like the PC industry. Intel doesn’t have a foothold in the mobile in world, which is growing, and investors don’t see another major catalyst for growth.

Google’s relatively high P/E of 22.58 is also a sign that investors expect the company to grow. It’s still very aggressive, but obviously nowhere near as as aggressive as Amazon’s.

Make sense?

geoduck

Yes thanks that helps

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