Further Thoughts on Apple and Investors
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.
Apple’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.)