Further Thoughts on Apple and Investors

by Steve Wildstrom   |   July 2nd, 2012

In a post this morning, Ben Bajarin speculated on what it is in investors’ thinking about Apple that keeps the stock price relatively depressed. Like Ben, I am not a financial analyst, but I think the mystery is even deeper than he suggests.

Price/earnings ratio chartApple’s stock price has move up smartly in recent months, but it has stayed pretty much in step with earnings–and the remarkable thing is how little investors think $1 of Apple profit is worth. The chart shows the price/earnings ratio–the recent stock price divided by per share earnings over the past 12 months–for Apple and a number of other tech companies. Apple’s PE of 14.2 actually puts it below the average of 15.4 and the median of 14.5 for the S&P 500.

None of the explanations advanced skeptically by Ben can begin to explain this. I think it is inevitable that the meteoric growth that Apple has enjoyed in recent quarters will soon slow if only because it is gradually saturating its markets–and the larger your base is, the harder it is to sustain high growth rates. But there is every reason to believe that Apple’s growth over any reasonable period in the future will exceed that of IBM, Oracle, or SAP, all of which enjoy higher PE ratios. And it makes no sense that a dollar of Google earnings is worth 24% more than a buck of Apple profit. It all seems a sort of anti-magical thinking.

The fact is that even if Apple falls to earth with slower growth and no new blockbuster products, its stock should reasonably fetch more than it does. But Apple’s PE ratio has been flat for about a year and was falling before that, so this isn’t a prediction that the price will go up anytime soon either.

(Disclosure: I do not directly own any Apple stock, though funds I invest in may.)

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Doug

    I think you have answered your own question.

    You make the statement: “I think it is inevitable that the meteoric growth that Apple has enjoyed
    in recent quarters will soon slow if only because it is gradually
    saturating its markets–and the larger your base is, the harder it is to
    sustain high growth rates.”

    Investors think the same way. And assume that just because it is big, rather, the biggest company around, it’s growth will inevitably slow. What most don’t realize is that Apple has a relatively small market share of each market that it is in, other than the one’s that it has created, i.e. it’s ecosystem and the iPad.