I am wondering if anyone can think of new ways to look at Apple’s PE. Consider it brainstorming. Here are two to start off with.

1) Would Apple’s PE be higher than it is now if it were growing earnings at only 30% a year rather than the approximately 80% clip it is currently at? While Apple is growing at 80%, people might be thinking: this growth is unsustainable for such a large company, so we are going to give them a ridiculously low PE until we get clarity about what their real long-term growth is. Whereas if Apple were only growing at 30%, people might think: yeah, that’s sustainable given the markets they’re in, their strong position, and their growth prospects, let’s give them a PE of 30.

2) Pretend Apple were to spin off the iPhone as a separate company. The iPhone is very roughly half their revenue and profits.

So what PE do you give to this new iPhone company? Well, it’s growing at maybe 100%. But on the other hand it might be like the RAZR and flame out after a couple of years. Consumers are fickle. But on the third hand, it is starting to get entrenched in business which gives it staying power. And it’s really not like the RAZR because it’s about the single damn most useful thing ever invented. Would the PE you give it be somewhat astronomical?

And THEN what PE do you give to the company that is left behind, Apple without the iPhone? Well, this company would largely consist of the Mac, which might be growing at 30% a year, and the iPad, which might be growing at 50-100%. It’s a computer business. It’s got a great reputation. It’s fairly entrenched in the consumer, educational, and business markets. It definitely has great prospects. And it’s not too big to keep growing long-term. Would you give it a PE of, say, 35? Then you would be valuing this company alone at more than Apple is being valued at today.

2 Cents - 22 January 2012 09:47 AM

I am wondering if anyone can think of new ways to look at Apple’s PE. Consider it brainstorming. Here are two to start off with.

1) Would Apple’s PE be higher than it is now if it were growing earnings at only 30% a year rather than the approximately 80% clip it is currently at? While Apple is growing at 80%, people might be thinking: this growth is unsustainable for such a large company, so we are going to give them a ridiculously low PE until we get clarity about what their real long-term growth is. Whereas if Apple were only growing at 30%, people might think: yeah, that’s sustainable given the markets they’re in, their strong position, and their growth prospects, let’s give them a PE of 30.

2) Pretend Apple were to spin off the iPhone as a separate company. The iPhone is very roughly half their revenue and profits.

So what PE do you give to this new iPhone company? Well, it’s growing at maybe 100%. But on the other hand it might be like the RAZR and flame out after a couple of years. Consumers are fickle. But on the third hand, it is starting to get entrenched in business which gives it staying power. And it’s really not like the RAZR because it’s about the single damn most useful thing ever invented. Would the PE you give it be somewhat astronomical?

And THEN what PE do you give to the company that is left behind, Apple without the iPhone? Well, this company would largely consist of the Mac, which might be growing at 30% a year, and the iPad, which might be growing at 50-100%. It’s a computer business. It’s got a great reputation. It’s fairly entrenched in the consumer, educational, and business markets. It definitely has great prospects. And it’s not too big to keep growing long-term. Would you give it a PE of, say, 35? Then you would be valuing this company alone at more than Apple is being valued at today.

2 Cents, the way to speak of the market “giving” AAPL a specific “PE” is exactly why I use the term “ISM” (Investor Sentiment Multiplier).  The market does to assign “PE’s”.  A “PEP” is what it is, oohing more, nothing less. 

Before we even know what the “PE” is, we know the underlying trailing EPS, and of course the value of the stock.  Investors place a value on the stock, and “PE” is determined by dividing that value by trailing earnings.

The question shouldn’t be why the “PE” is what it is, the question should be why the market doesn’t value AAPL any higher than it does.

My take is that first, institutional investors don’t have the liquidity to buy up AAPL My first thought on this was the evaporation of liquidity caused by the bak meltdown of 2008.  I have come to believe that whatever affect that event had on liquidity, was amplified (starting in early 2011) by a shift in investor funds away from equities in favor of bonds.

Additionally, investors were reticent about buying up Apple because, in my analysis, Apple missed its numbers 4 of the last 5 quarters.  Yes Apple is growing at an incredible rate, but Apple didn’t grow at the rates it’s guidance indicated.  Why?  Was Apple experiencing insurmountable production problems.  Was the competition making substantial inroads into Apple’s territory?  Was Jobs health really having an impact on Apple?

I think the reversal of the equity to bond market shift, coupled with two or three excellent quarters, in which Apple satisfies the market that a/ they don’t have any production problems, b/ the competition is insignificant and, c/ Jobs passing, while emotionally hard, is not going to negative impact Apple’s performance, will put AAPL on a trajectory we would all rather see.

It’s worth repeating that even if Apple’s growth drops to zero from this point forward and the price stays constant, P/E will fall substantially. Right now it’s 15.38. but that’s not based on current earnings, but on four quarters whose midpoints were 5, 8, 11 and 14 months ago. At 80% past growth rate, even with zero growth rate going forward, P/E will be below 10 in a year’s time at the current share price and earnings.

I don’t worry about the price-earnings multiple. For a company growing as quickly as Apple, the multiple is only a factor in how quickly the shares will reach a particular price. It’s earnings growth that drives the share price appreciation over time.

sleepygeek - 23 January 2012 01:13 PM

It’s worth repeating that even if Apple’s growth drops to zero from this point forward and the price stays constant, P/E will fall substantially. Right now it’s 15.38. but that’s not based on current earnings, but on four quarters whose midpoints were 5, 8, 11 and 14 months ago. At 80% past growth rate, even with zero growth rate going forward, P/E will be below 10 in a year’s time at the current share price and earnings.

So, how low can it go in 1yr. or 2yrs.? Can they give it a P/E of <5 in 4-5 years?
Seriously, I’d like to hear predictions.

Ahahahaha no.

If anything, I think the P/E floor, absolute floor, will generally be in the company of the “great” large caps such as INTC and XOM (10-12).  I wouldn’t count out a temporary P/E dip to under 10, but my “laugh zone” theory is holding for now.  At some level, those who value AAPL are forced to recognize its…well…value.  Immense cash + impeccable financials + growing faster in absolute dollar terms than any tech company and maybe any company period = grudging, unspoken acknowledgement that maybe Apple isn’t gonna go about its “faddish fade” anytime soon + AAPL is highly unlikely to trade below its peers. 

The “ideal” state is for AAPL to be treated similarly to IBM.  But I’m not holding my breath.

See, I just have this sneaking suspicion in the back of my mind that we all (myself most definitely included) have been so beaten into submission by what has happened with Apple’s valuation that it is hard to think straight. But one day the sun is going to come out again and when it does, it would be good to be ready…

There’s nothing wrong with placing upside bets assuming a multiple of 10-12 if reality is better than that. 

Mav - 23 January 2012 02:38 PM

At some level, those who value AAPL are forced to recognize its…well…value.  Immense cash + impeccable financials + growing faster in absolute dollar terms than any tech company and maybe any company period = grudging, unspoken acknowledgement that maybe Apple isn’t gonna go about its “faddish fade” anytime soon + AAPL is highly unlikely to trade below its peers. 

Agree.

Turning on its head the arithmetical fact that if AAPL price and earnings don’t change for a year P/E will become 10, if P/E remains at 15, even if there is zero growth from this point, stock price will be up 50% in a year!

sleepygeek - 23 January 2012 05:14 PM

Turning on its head the arithmetical fact that if AAPL price and earnings don’t change for a year P/E will become 10, if P/E remains at 15, even if there is zero growth from this point, stock price will be up 50% in a year!

Ah, the glass half full.

sleepygeek - 23 January 2012 05:14 PM

even if there is zero growth from this point, stock price will be up 50% in a year!

And if there were to be some non-zero small growth, perhaps from iPad 3 or iPhone 5 or China Telecom or China Mobile or other carriers worldwide like T-Mobile who now desperately need the iPhone to stay competitive or Apple TV or whatever else they are working on so feverishly and secretly in their Apple labs… if there were to be such small growth, what would the price be up then?

sleepygeek - 23 January 2012 05:14 PM

Turning on its head the arithmetical fact that if AAPL price and earnings don’t change for a year P/E will become 10, if P/E remains at 15, even if there is zero growth from this point, stock price will be up 50% in a year!

There is only so low the P/E for AAPL can go before a takeover offer is made, which would undoubtedly bump the P/E higher.

In a years time, if apples P/E is 10, and it has 125 billion or thereabouts in the bank, at that point you wouldn’t bet against Chinese or Arab interests launching a buyout offer…

Maybe not an AAPL buyout, but a large share accumulation by a country?  That would be interesting.

Mav - 23 January 2012 05:56 PM

Maybe not an AAPL buyout, but a large share accumulation by a country?  That would be interesting.

Or it could go the other way. Apple could buy any number of smaller countries, or even a few larger European ones (we won’t name names). Possibly even a continent - and then they get extra armies at the end of each turn. At the very least they could set up the taxes to their liking.

2 Cents - 23 January 2012 04:09 PM

See, I just have this sneaking suspicion in the back of my mind that we all (myself most definitely included) have been so beaten into submission by what has happened with Apple’s valuation that it is hard to think straight. But one day the sun is going to come out again and when it does, it would be good to be ready…

I feel your pain, as smart as I think I am, I lost a great deal during 2011.  It caused me to look deeper into Apple’s past results.

My biggest problem was failing to believe that Apple could be fallible.  The manner in which Apple guides has numbed us to believe that Apple never misses estimates.  I mean after all, Apple always beats consensus, right?  The media always talks up the size of the beat, right?  The media always tells us how long Apple has been beating its guidance by large amounts, right?  Yeah, but how good are those consensus estimates?  Pretty damn good, actually.

We all know that Apple guides revenue 15% below their own expectations.  How do we know that?  Because Apple reports revenue that is generally about 15% above guidance.

We can do the same thing for GM% (250 points lower that expected), Operating Expense, Other Income, tax rate and EPS.

But when Apple does not report in line with the metrics we have discovered (over a long period of time), we IGNORE it.  I’ll bet that there are others that do not.  And when Apple fails to deliver THEY stop buying, or actually begin selling.  Because EPS is higher, but AAPL isn’t, we get a lower ISM.  ISM wasn’t compressed, the value of AAPL was compressed.

The value of AAPL is what the market makes it, it is not the ISM.  That is just a metric used to compare earnings between Companies with differing amounts of shares outstanding.

Once you come to grips with the notion that Apple CAN miss numbers, numbers that can be pre-determined, then determining when that happens becomes very apparent.  Except for the June quarter of 2011, it happened during all of fiscal 2011.

Why?

Now there’s a question for the ages.  But its right in line with this thread’s attempts to uncover potential hazards to earnings.  We should be doing that kind of exercise immediately after earnings, not just before.  QUESTION: Why didn’t Apple make consensus?  When we answer that, we know why AAPL’s valuation isn’t where we want it, and that prepares us for intelligent investing over the next 3 months, or longer.

I feel Apple’s PE will most likely compress a little more before bottoming out—maybe 11-12.  I don’t see the PE expanding beyond an intra-quarter high of about 16 for several reasons:

- large market cap: Apple is breaking the trend of large market cap companies.  Historically, companies reaching this size have a slow-down in growth rates.

- market doesn’t think Apple’s growth rate is sustainable. Even though they report high growth each quarter, that almost makes the case stronger that it is not sustainable.  “Well, they had growth again this quarter, but it can’t continue at this pace”—I think this will be said every quarter until growth actually slows someday and then it becomes true. 

- margins:  Apple is attracting more competitors in its market segments.  The market feels it will not be possible to sustain the high levels of margins it has enjoyed in the past. 

- growth dependent on a narrow product line-up. An unsuccessful product upgrade (iPhone, iPad) would be devastating to growth.  Since their products are on annual upgrade cycles, it is difficult to project long-term growth rates and conservative models are used. 

- growth dependent on new product segments. Apple TV could be the next product segment, but the TV market is very competitive with low margins. The ability to deliver / control content is also difficult in this market. There is doubt about Apple succeeding as they have in phones and tablets.

While I don’t agree with all of the above points, it doesn’t matter what my personal opinion is.  If enough of “the market” is concerned about the above, Apple will remain at these “depressed” PE levels.