There is not a whole lot of room to grow there unless they introduce yet a new product category. I'm not saying that they won't, but I do think these are valid reasons for the stock not having a P/E ratio of 50+.
Thing about the valuation is this: Since the beginning of "AAPL time", people have freaked the stock out of a high valuation. All the while, the company *Accelerates growth every year, i.e every year it raises the bar and gets richer, it grows even more*. Therefore, AAPL has never had a fair valuation, because people have constantly said "how can it maintain? I don't understand the company/nobody has ever done this/therefore I say it deserves a low valuation".... all the while, the company has soared.... but the fear about "growth" sticks to its ideologies, and doesn't listen to the company, doesn't watch the company prove them wrong over and over and over and over.... etc. etc. etc. etc. again.
People will misunderstand the company and be fearful of its uncharted territory (it is literally writing the rule books as it goes along, the pages ahead are blank) forever it seems. My prediction is that P/E will eventually ACCELERATE when the company matures and growth matures yet sustains. That's how weird Wall Street is. Fundamentals will always catch up one way or another, and I think it will be when Apple proves that it doesn't need to grow 100% year over year, yet is still "alive and kicking", and still doing what it does well, that Wall Street gives it a more generous P/E. As of now, the stock will accelerate with the company performance, but Wall Street can't keep up with the companies performance, and complicate, manipulate, and stupify things.
I also think that Wall Street is begging for a Stock split. And with how Tim Cook has showed SOME recognition to W.S, I think it's in the cards, they're just waiting until they might "need it". I know there are lots of pro's and con's, but I think a split will knock out one big irrational/amateur knock against it ("It's too expensive!.... I don't know wtf I'm talking about"! ).
Apple aren't either. People seem to underestimate Apple's management team.... the same people who were pivotal parts of getting this company to where they are at.
True. That’s why in 2005, before the iPhone era, when Apple stock was trading at $30s, I forecast an Apple lead revolution and Apple stock multiplying several fold.
Apple still has all the potential to deliver, it still has an edge... but Apple now is in the most vulnerable position in the last 7 years.
Yeah, the laws of "nature" have it so anyone who's regained "top status" has the most to lose. Apple still act like an "Upstart" and as long as they hold onto that drive and ideology, they'll continue to deliver like one. They need to remain hungry and want to kick ass, and they need to remain out for blood. I think this team, who are not only closely tied to Steve Jobs and his masterclass at that very nature, are exactly that, and I think people forget that. I also feel from what I've gathered and witnessed by Tim Cook, is that he won't settle for "ruining" what Steve Jobs created. I feel these guys want to kick butt not only to prove that they aren't failures and didn't ruin Steve's legacy, but also to uphold Steve's legacy.
Give it a couple of years before you write off the teams abilities to continue to push forward at a venomous pace, is all I'm saying (to everybody in Internet-land who this applies to). If they go lukewarm, I'll be the first to cash out, but we aren't even smelling that yet.
Ron Johnson is taking mega heat lately, so who knows, maybe we can get him back onboard as well.
If AAPL ever hits a PE of 20, I am out. I think the rational concern for investors at this point is what will the beginning of the end look like. In 2006/7, there was concern that the iPod market was being saturated and growth was gone. Some analysts continued to think that until AAPL eliminated the subscription model for the iPhone, unleashing a huge upside in realized earnings.
What happens when iPhone sales mature and growth stalls-- will something else fill in the hole? What other markets could AAPL enter where the synergies would remain? What will the next disruptive product be in their current markets? Will they squander their cash? Will key talent retire before new blood can begin to make a change?
These things are true for all middle-aged companies.
Guys!! It is clear that big investors want (us) to sell now !!! Surrender or scared !!! Apple bridge is falling down , falling down …. I am so scared !!!!! So scared !!!!!!!!! I am going to surrender !!!
If AAPL ever hits a PE of 20, I am out. I think the rational concern for investors at this point is what will the beginning of the end look like. In 2006/7, there was concern that the iPod market was being saturated and growth was gone. Some analysts continued to think that until AAPL eliminated the subscription model for the iPhone, unleashing a huge upside in realized earnings.
What happens when iPhone sales mature and growth stalls-- will something else fill in the hole? What other markets could AAPL enter where the synergies would remain? What will the next disruptive product be in their current markets? Will they squander their cash? Will key talent retire before new blood can begin to make a change?
These things are true for all middle-aged companies.
Consider this, in Wall Street's obsession with "Growth", they forget that for a company to truly succeed, it doesn't need to "win a game". What if Apple completely stagnated? What if they grew at a 0% pace? What would that mean? I'll answer: Technically it would mean that they'd STILL be making money hand over fist, they'd STILL sell massive amounts of products to superbly happy customers, they'd still be amassing massive amounts of cash, they'd still be generating more revenue and profit than any other company out there, and they'd still have a Dividend.
Consider that AMZN has a 190 P/E (stupid) and DECREASES every quarter in "Growth", and how does Apple going in a straight line sound now?
Point is, even if AAPL stagnated, they still deserve a higher P/E ratio than they have now, as they'd still be making cash hand over fist and dominating. Why do people correlate slowing growth with no profit, or with "going out of business"?. If you don't agree, then you must not agree with any companies valuation on the market. The fact that AAPL is so successful, and growing not only steadily, but ACCELERATING and growing DOUBLE every quarter, is SO brushed aside by spoiled Wall Street expectations toward Apple, it's ridiculous.
Thing about the valuation is this: Since the beginning of "AAPL time", people have freaked the stock out of a high valuation. All the while, the company *Accelerates growth every year, i.e every year it raises the bar and gets richer, it grows even more*. Therefore, AAPL has never had a fair valuation, because people have constantly said "how can it maintain? I don't understand the company/nobody has ever done this/therefore I say it deserves a low valuation".... all the while, the company has soared.... but the fear about "growth" sticks to its ideologies, and doesn't listen to the company, doesn't watch the company prove them wrong over and over and over and over.... etc. etc. etc. etc. again.
People will misunderstand the company and be fearful of its uncharted territory (it is literally writing the rule books as it goes along, the pages ahead are blank) forever it seems. My prediction is that P/E will eventually ACCELERATE when the company matures and growth matures yet sustains. That's how weird Wall Street is. Fundamentals will always catch up one way or another, and I think it will be when Apple proves that it doesn't need to grow 100% year over year, yet is still "alive and kicking", and still doing what it does well, that Wall Street gives it a more generous P/E. As of now, the stock will accelerate with the company performance, but Wall Street can't keep up with the companies performance, and complicate, manipulate, and stupify things.
I also think that Wall Street is begging for a Stock split. And with how Tim Cook has showed SOME recognition to W.S, I think it's in the cards, they're just waiting until they might "need it". I know there are lots of pro's and con's, but I think a split will knock out one big irrational/amateur knock against it ("It's too expensive!.... I don't know wtf I'm talking about"! ).
People can freak out, sure, but you have to look at the scale of growth that they are looking at now. Growing 100% YOY when you are $1 billion dollar company, or even $20 billion dollar company is one thing, doing that at $500 billion is a feat of an entirely different magnitude. As I mentioned before, in order to maintain that sort of revenue/profit margin, you need products which are:
1) high margin
2) replaced fairly often
3) have a broad worldwide user base
There's another company that doesn't grow 100% YOY but does grow 20-30% in a very stable way. Their P/E is 10 and their name is Microsoft. High P/E ratios are typically reserved for companies who can grow exponentially, not linearly. (I'm not a huge fan of P/E ratios anyways) If apple can produce another disruptive product, I completely believe their growth rates can continue, but because of their current size, I think this will be a difficult task. They've benefited greatly from the burgeoning Chinese market and other BRICs countries, but with the global economic picture looking dimmer, and the number of potential customers they have shrinking, its just going to be a difficult task. Time will tell (disclosure, I'm long apple and have been for a while)
My general feel, or prediction, is that Apple will continue to have breakneck growth for another year or two before settling down to linear growth/their next disruptive product.
My general feel, or prediction, is that Apple will continue to have breakneck growth for another year or two before settling down to linear growth/their next disruptive product.
Hey, sounds like a company worthy of a very high P/E ratio right there, especially when considering its the the worlds most successful company already.
Consider this, in Wall Street's obsession with "Growth", they forget that for a company to truly succeed, it doesn't need to "win a game". What if Apple completely stagnated? What if they grew at a 0% pace? What would that mean? I'll answer: Technically it would mean that they'd STILL be making money hand over fist, they'd STILL sell massive amounts of products to superbly happy customers, they'd still be amassing massive amounts of cash, they'd still be generating more revenue and profit than any other company out there, and they'd still have a Dividend.
Consider that AMZN has a 190 P/E (stupid) and DECREASES every quarter in "Growth", and how does Apple going in a straight line sound now?
Point is, even if AAPL stagnated, they still deserve a higher P/E ratio than they have now, as they'd still be making cash hand over fist and dominating. Why do people correlate slowing growth with no profit, or with "going out of business"?. If you don't agree, then you must not agree with any companies valuation on the market. The fact that AAPL is so successful, and growing not only steadily, but ACCELERATING and growing DOUBLE every quarter, is SO brushed aside by spoiled Wall Street expectations toward Apple, it's ridiculous.
Valuations and extreme P/Es are based on growth potential, not the size of the cash hoard. Would you buy a company at 50x their annual earnings if they had flat growth? I thought not.
Hey, sounds like a company worthy of a very high P/E ratio right there, especially when considering its the the worlds most successful company already.
I think I need to clarify, breakneck for apple is 50-100% earnings growth. smaller companies can do many multiples of that. Betting on future disruptive products is a very speculative thing to do, especially when you're talking about investing large sums of money.
Valuations and extreme P/Es are based on growth potential, not the size of the cash hoard. Would you buy a company at 50x their annual earnings if they had flat growth? I thought not.
My point however, is that plenty of companies get valuations from Wall Street that are significantly higher than AAPL's, and these companies either maintain flat growth, or decrease profits and/or revenue every quarter. This all exists, be it rational or not, yet people act as if AAPL even slightly can maintain its massive current performance, it's worthy of a non existent P/E.
I think I need to clarify, breakneck for apple is 50-100% earnings growth. smaller companies can do many multiples of that. Betting on future disruptive products is a very speculative thing to do, especially when you're talking about investing large sums of money.
Do a stock screen for companies with 200%+ earnings growth, you might be surprised how rare it is, except with margin expansion combined with dramatically increasing revenue. It might work for companies with no marginal product cost, but that is about it.
AAPL today is a good value, if that is how you choose to invest. If you play momentum, you want to wait to get in until after it turns.
But, all Europe can do for Apple is provide a strong growth source when things are sorted out. Today it isn't a critical part of their earnings.
Consider this, in Wall Street's obsession with "Growth", they forget that for a company to truly succeed, it doesn't need to "win a game". What if Apple completely stagnated? What if they grew at a 0% pace? What would that mean? I'll answer: Technically it would mean that they'd STILL be making money hand over fist, they'd STILL sell massive amounts of products to superbly happy customers, they'd still be amassing massive amounts of cash, they'd still be generating more revenue and profit than any other company out there, and they'd still have a Dividend.
Consider that AMZN has a 190 P/E (stupid) and DECREASES every quarter in "Growth", and how does Apple going in a straight line sound now?
Point is, even if AAPL stagnated, they still deserve a higher P/E ratio than they have now, as they'd still be making cash hand over fist and dominating. Why do people correlate slowing growth with no profit, or with "going out of business"?. If you don't agree, then you must not agree with any companies valuation on the market. The fact that AAPL is so successful, and growing not only steadily, but ACCELERATING and growing DOUBLE every quarter, is SO brushed aside by spoiled Wall Street expectations toward Apple, it's ridiculous.
Exactly. Let's look at what P/E means.
There are two components:
1. Investors are willing to invest money in exchange for getting a return on that investment. It's like putting money into a bank or into a bond. If you put the money into a bank, you will accept 2-3% return because of the safety. For a bond, you will accept 5-7% return. If you put the money into a stock which is earning a profit, that profit is your return - which you recover when the return is saved, reinvested, or distributed to shareholders).
2. Investors are willing to pay additional money in exchange for the expectation that the stock's return will grow over time. When you have a rapidly growing stock (or a stock that the investor expects to grow), the investor will put money in in the hopes that they will receive money in the future. Because of the risk, the returns need to be significant. (LQMT is an example. They've lost money every year so far (except possibly the year that Apple paid a few million dollars for rights to use the product), yet they have enough investors to make the market cap millions of dollars - even though income is negative. The investors think that they will hit it big in the future and are willing to take that risk.
Similarly, if a company has negative growth, investors will be less likely to invest than on the simply return principle outlined in #1. So the P/E will be lower than the current earnings would suggest.
What does that mean for Apple? Simple. The market as a whole is trading at a P/E of 17 or 18. That means that if your company is growing as fast as the average Wall Street company, the shares should trade at around 17 or 18 times the earnings. That says that the market has determined that a 6% return is about right for stocks - on average, covering the evaluation in #1 above. If the market believes your stock is growing at faster than the average company, you should be able to add a component for #2, so your P/E should be greater than 17-18. If your stock is growing slower than the market average, you will subtract a 'growth premium' per #2 above and P/E will be lower than 17-18.
Apple is trading at around 13 (less after you back out the cash). Is it overvalued or undervalued? No one knows. The only way to know will be to project yourself into the future to see what Apple's future earnings are. However, the MARKET is saying that they expect Apple to grow at significantly slower than the average of the stocks on the exchange. Since most companies are growing at no better than inflation, that means that the market is predicting Apple will actually decline in profits over the coming years.
So, if you believe that Apple's profits will significantly decline relative to the market, then you would conclude that Apple is fairly priced.
If you believe that Apple will grow at roughly the same rate as the market (a few percent for inflation) over the next few years, then you should expect Apple to return to the market average P/E of 17-18, which means that Apple is a modest buy.
If you believe that Apple will grow faster than the market, then its P/E should be higher than 17-18, so it becomes a strong buy.
The market has made its position known. I happen to disagree - as does Zaky. I don't see anything that suggests that Apple's profits are going to decline in the near future. Even if you think that there's no 'next big thing' on the horizon, it seems to me that Apple's business model should allow them to grow at least as quickly as the rest of the market.
Is it overvalued or undervalued? No one knows. The only way to know will be to project yourself into the future to see what Apple's future earnings are. However, the MARKET is saying that they expect Apple to grow at significantly slower than the average of the stocks on the exchange. Since most companies are growing at no better than inflation, that means that the market is predicting Apple will actually decline in profits over the coming years.
So, if you believe that Apple's profits will significantly decline relative to the market, then you would conclude that Apple is fairly priced.
If you believe that Apple will grow at roughly the same rate as the market (a few percent for inflation) over the next few years, then you should expect Apple to return to the market average P/E of 17-18, which means that Apple is a modest buy.
If you believe that Apple will grow faster than the market, then its P/E should be higher than 17-18, so it becomes a strong buy.
The market has made its position known. I happen to disagree - as does Zaky. I don't see anything that suggests that Apple's profits are going to decline in the near future. Even if you think that there's no 'next big thing' on the horizon, it seems to me that Apple's business model should allow them to grow at least as quickly as the rest of the market.
There's also the thing about "Nobody seems to understand Apple" or "There's stocks, bonds, and Apple", basically the idea that nobody, absolutely nobody, can predict anything of Apple when it comes to their stock price.
As it is there are only two external factors driving this down:
1. Facebook IPO, where 1/3rd of the shares sold were from hedge funds.
2. PIIGS saber rattling.
Yes Apple is exposed to Europe, but the EUR-USD dropped 10 cents/dollar back in November, and it dropped another 3-5 cents in the last week, the Greeks are doing bank runs, so the picture over there looks grim, with everyone predicting Greece will exit the Euro. So if most of Apple's profits are in Euros because of tax loopholes, then it's losing money (In USD value) just by virtue of having done that.
I see iOS fatigue on the horizon. Multiple icons drain your focus. Plus perennially unreliable syncing. Add to that a tiny 3.5” screen and no wonder Angry Birds, which requires rudimentary finger gestures, is the king.
The time is ripe for a mobile device with a bigger screen, a UI that steers your focus toward creating and editing meaningful content rather that distracting you with colorful entertainment icons.
Unless Apple ups its game soon, I see trouble. Competitors, while being at a disadvantage due to non-integrated software and hardware, are not sleeping.
iOS fatigue? Huh? Your objections to iOS are just fantasy imho.
The one problem I have always had with Apple's iPhone business plan is "one phone per year". So far it's been working out for them but, as competitors bring out other compelling products, we may see a crack in Apple's wisdom of OPPY. Actually I think we saw that crack last year in Apple's 2011 4th fiscal quarter (and this year I'm waiting to see it even earlier in Apple's 2012 3rd fiscal quarter) when we saw a substantial drop in iPhone sales. I think this opens a window of opportunity for Samsung and others... a weak spot that others notice and can use to their advantage.
Of course, my problems with Apple's OPPY model could also be fantasy.
iOS fatigue? Huh? Your objections to iOS are just fantasy imho.
The one problem I have always had with Apple's iPhone business plan is "one phone per year". So far it's been working out for them but, as competitors bring out other compelling products, we may see a crack in Apple's wisdom of OPPY. Actually I think we saw that crack last year in Apple's 2011 4th fiscal quarter (and this year I'm waiting to see it even earlier in Apple's 2012 3rd fiscal quarter) when we saw a substantial drop in iPhone sales. I think this opens a window of opportunity for Samsung and others... a weak spot that others notice and can use to their advantage.
Of course, my problems with Apple's OPPY model could also be fantasy.
We'll see.
I expect that we'll see Apple increase the pace to more like 3 quarters per phone for that very reason. Apple isn't dumb, they don't want to open the window for competitors, so if it doesn't happen this year (I definitely think there's a chance of an early Autumn launch) then it should happen next year.
I expect that we'll see Apple increase the pace to more like 3 quarters per phone for that very reason. Apple isn't dumb, they don't want to open the window for competitors, so if it doesn't happen this year (I definitely think there's a chance of an early Autumn launch) then it should happen next year.
My thinking is that Apple could update the 4S with a new processor, more RAM, 8 track connector or something else at the same time (or earlier) as the 6th gen release.
My thinking is that Apple could update the 4S with a new processor, more RAM, 8 track connector or something else at the same time (or earlier) as the 6th gen release.
I think we saw last year just how silly that idea is.
Similarly, if a company has negative growth, investors will be less likely to invest than on the simply return principle outlined in #1. So the P/E will be lower than the current earnings would suggest.
What does that mean for Apple? Simple. The market as a whole is trading at a P/E of 17 or 18. That means that if your company is growing as fast as the average Wall Street company, the shares should trade at around 17 or 18 times the earnings. That says that the market has determined that a 6% return is about right for stocks - on average, covering the evaluation in #1 above. If the market believes your stock is growing at faster than the average company, you should be able to add a component for #2, so your P/E should be greater than 17-18. If your stock is growing slower than the market average, you will subtract a 'growth premium' per #2 above and P/E will be lower than 17-18.
Apple is trading at around 13 (less after you back out the cash). Is it overvalued or undervalued? No one knows. The only way to know will be to project yourself into the future to see what Apple's future earnings are. However, the MARKET is saying that they expect Apple to grow at significantly slower than the average of the stocks on the exchange. Since most companies are growing at no better than inflation, that means that the market is predicting Apple will actually decline in profits over the coming years.
So, if you believe that Apple's profits will significantly decline relative to the market, then you would conclude that Apple is fairly priced.
If you believe that Apple will grow at roughly the same rate as the market (a few percent for inflation) over the next few years, then you should expect Apple to return to the market average P/E of 17-18, which means that Apple is a modest buy.
If you believe that Apple will grow faster than the market, then its P/E should be higher than 17-18, so it becomes a strong buy.
The market has made its position known. I happen to disagree - as does Zaky. I don't see anything that suggests that Apple's profits are going to decline in the near future. Even if you think that there's no 'next big thing' on the horizon, it seems to me that Apple's business model should allow them to grow at least as quickly as the rest of the market.
I don't even know where to begin.
First of all, with respect to 90% of the posters, I'm immediately reminded of Kramer and Jerry. And that's Cosmo Kramer, not Mad Money's Jim Cramer who is, in large part, single-handedly responsible for so many being armed with pithy sound bites that they don't know how, when, or where to correctly apply because the lack the fundamental, underlying expertise that someone like Jim Cramer has.
Back to Kramer and Jerry:
Jerry: So, we're going to make the post office pay for my new stereo now?
Kramer: It's a write-off for them.
Jerry: How is it a write-off?
Kramer: They just write it off.
Jerry: Write it off what?
Kramer: Jerry, all these big companies, they write off everything.
Jerry: You don't even know what a write-off is.
Kramer: Do you?
Jerry: No, I don't!
Kramer: But they do. And they're the ones writing it off.
Jerry: I wish I had the last twenty seconds of my life back.
First of all, there are many different reasons for trading in equities and different ways in doing so. The factors that you evaluate are different in each case, yet I see them being freely mixed in the discussion here.
Looking at how "The Market" prices a publicly held stock relative to the stock in other publicly held companies generally involves a short-term view of the collective market perception of how buying and selling opportunities in one specific equity compared to the marginal opportunities to invest a finite amount cash in one or more other equities. This analysis and investment decision is typically made with a specific time horizon in mind and it is one that is often of a relatively short-term nature. For example, "AAPL looks relatively undervalued compared to XYZ, therefore I'm going to buy 10,000 shares of AAPL and then sell when they're up $10 or in 2 weeks, whichever comes first." This is generally a view that may be formed based upon the available point-in-time information or from a basic extrapolation of recent trends.
(And before anyone jumps on my use of "margin," please make sure you first understand the difference between the economics concept of the margin with respect to the deployment of a specific, incremental amount of capital and the trading concept of using margin, or in other words, making a leveraged purchase of a traded instrument.)
This contrasts to fundamental analysis of expectations of future cash flows that a particular company will generate. These pro forma cash flows are modeled based upon scenario analysis of specific expectations regarding factors like market position, competitor analysis, pricing power, buying power, product pipeline, reputation, operating margins, liquidity, leverage, management, litigation, cost of capital, environmental risks, labor risks, market disruption, and so on. This is the type of in-depth analysis that is done by equity analysts at, for example, Wall Street firms such as Morgan, Citi, JPMC, Piper Jaffrey, Sterne Agee, etc.; as well as by the analysts at the bond rating firms such as Fitch and Moody's; by credit analysts at commercial and investment banks; and by M&A teams, VC firms, etc.
The objective in this fundamental analysis is to build a baseline scenario of 3-year cash flow projections, which are based on proprietary P&E and balance sheet models. This cash flow is then used as a basis to formulate buy/sell recommendations and target stock prices; credit ratings and default probabilities; valuations for mergers, acquisitions, and VC-type investments; etc.
Specific factors that might be relevant with respect to formulating a cash-flow forecast for Apple Inc might include:
Impact of management change, most obviously with respect to Steve Jobs/Tim Cook, but also the possible impacts from Ron Johnson's departure, a scenario where Jony Ive might leave Apple, and so on
Apple's use of it's massive cash position, whether for acquisitions, or supply-chain management with significant forward purchases to lock in prices for key components such as flash memory
Apple's ability to continue innovating, gain/maintain/lose market share, overcome competitive challenges such as the most obvious ones of Google/Android and Samsung, perpetuate the brand image as cool and aspirational, etc.
Maintaining margins on products as a function of pricing power and buying power
and so on...
There are additional considerations as well. jragosta's reference to "the market as a whole" and implications regarding growth rates, earnings, share price, etc. is off-base. There is no "market as a whole," or at least not in any way that has any bearing or analytical value with respect to the market price of Apple's common stock. What is relevant is market or industry sectors, not to mention geography, listing exchange, etc. This is the reason why there are utilities indexes, transportation indexes, etc. so as to facilitate comparison of like stocks because that's where comparison of growth rates, margins and so on are actually relevant. Is there any meaning in comparing Apple to, let's say, Nike or Coca-Cola, or a major pharmaceutical company? The short answer is no. The longer answer is that if an investor is looking for the best return/reward on the investment of their marginal dollar and is not taking anything else into consideration such as diversification, growth vs. dividend, and so on, and they expect a better return on a short-term investment in Apple than in Berkshire Hathaway, they may choose to invest that marginal dollar in AAPL. But that is completely contrary to the long-term view of an investment such as Warren Buffet's moderately successful (sarcasm) approach at Berkshire Hathaway. He has done amazingly well by identifying investments based upon developing a long-term view of the unique fundaementals of a specific company.
Another factor that is uniquely relevant to Apple is that no company has, or ever has had, composed such a significant component of the total market cap across an industry, an exchange, an index, all publicly held large-cap stocks, or what have you. Apple being such a Goliath has very significant consequences in terms of it's ability to move market indices such as the S&P 500. It is the most widely held equity and is a significant component in many, if not most, mutual funds. That affects the buying decision of fund managers, especially those managing index funds where they need to continue rebalancing their holdings. AAPL, I would believe but am not certain, is a very liquid stock but the ability to sell-off or buy a large block of shares will be constrained by both availability and the market impact of a large number of shares changing hands.
Further, the law of large numbers, which has been mentioned previously in this thread, is very relevant to Apple. The larger something is, the harder it is to make signficant changes in its size; and this is particularly true for companies with sizable revenues, earnings, market share, and/or market cap. If a company has 2% market share, it is far easier to double that than a company that has 20% market share. And obviously extrapolating from that, a company with an extremely large market share would be essentially constrained by its ability to actually influence the overall growth of the entire market rather than simply its abillity to capture a larger portion of market share from its competitors.
I quoted jragosta at the top because I was motivated to comment specifically regarding his referring to a comparison of Apple to some mythological "average" publicly held company, but obviously my post is directed at most all of the preceding posts in this thread.
Let the attacks begin...
BTW, if you want to make personal attacks, don't -- I can respond better than you can heckle. If you're not sure what you're talking about, please remember Abraham Lincoln's famous words, "It is better to remain silent and be thought a fool, than to speak and remove all doubt." If you know what you're talking about and can frame a reasonable and well articulated counter-argument, then bring it on ;-)
(Full disclosure: I don't have any direct position in AAPL, nor do I intend to make one in the forseeable future. I don't work for Apple or any of its competitors. I haven't been a banker for a very long time and I don't hold any type of analyst position.)
Comments
Quote:
Originally Posted by benjaminm3
There is not a whole lot of room to grow there unless they introduce yet a new product category. I'm not saying that they won't, but I do think these are valid reasons for the stock not having a P/E ratio of 50+.
Thing about the valuation is this: Since the beginning of "AAPL time", people have freaked the stock out of a high valuation. All the while, the company *Accelerates growth every year, i.e every year it raises the bar and gets richer, it grows even more*. Therefore, AAPL has never had a fair valuation, because people have constantly said "how can it maintain? I don't understand the company/nobody has ever done this/therefore I say it deserves a low valuation".... all the while, the company has soared.... but the fear about "growth" sticks to its ideologies, and doesn't listen to the company, doesn't watch the company prove them wrong over and over and over and over.... etc. etc. etc. etc. again.
People will misunderstand the company and be fearful of its uncharted territory (it is literally writing the rule books as it goes along, the pages ahead are blank) forever it seems. My prediction is that P/E will eventually ACCELERATE when the company matures and growth matures yet sustains. That's how weird Wall Street is. Fundamentals will always catch up one way or another, and I think it will be when Apple proves that it doesn't need to grow 100% year over year, yet is still "alive and kicking", and still doing what it does well, that Wall Street gives it a more generous P/E. As of now, the stock will accelerate with the company performance, but Wall Street can't keep up with the companies performance, and complicate, manipulate, and stupify things.
I also think that Wall Street is begging for a Stock split. And with how Tim Cook has showed SOME recognition to W.S, I think it's in the cards, they're just waiting until they might "need it". I know there are lots of pro's and con's, but I think a split will knock out one big irrational/amateur knock against it ("It's too expensive!.... I don't know wtf I'm talking about"!
Quote:
Originally Posted by Godzilla
Apple aren't either. People seem to underestimate Apple's management team.... the same people who were pivotal parts of getting this company to where they are at.
True. That’s why in 2005, before the iPhone era, when Apple stock was trading at $30s, I forecast an Apple lead revolution and Apple stock multiplying several fold.
Apple still has all the potential to deliver, it still has an edge... but Apple now is in the most vulnerable position in the last 7 years.
Yeah, the laws of "nature" have it so anyone who's regained "top status" has the most to lose. Apple still act like an "Upstart" and as long as they hold onto that drive and ideology, they'll continue to deliver like one. They need to remain hungry and want to kick ass, and they need to remain out for blood. I think this team, who are not only closely tied to Steve Jobs and his masterclass at that very nature, are exactly that, and I think people forget that. I also feel from what I've gathered and witnessed by Tim Cook, is that he won't settle for "ruining" what Steve Jobs created. I feel these guys want to kick butt not only to prove that they aren't failures and didn't ruin Steve's legacy, but also to uphold Steve's legacy.
Give it a couple of years before you write off the teams abilities to continue to push forward at a venomous pace, is all I'm saying (to everybody in Internet-land who this applies to). If they go lukewarm, I'll be the first to cash out, but we aren't even smelling that yet.
Ron Johnson is taking mega heat lately, so who knows, maybe we can get him back onboard as well.
What happens when iPhone sales mature and growth stalls-- will something else fill in the hole? What other markets could AAPL enter where the synergies would remain? What will the next disruptive product be in their current markets? Will they squander their cash? Will key talent retire before new blood can begin to make a change?
These things are true for all middle-aged companies.
SELL
Quote:
Originally Posted by aaarrrgggh
If AAPL ever hits a PE of 20, I am out. I think the rational concern for investors at this point is what will the beginning of the end look like. In 2006/7, there was concern that the iPod market was being saturated and growth was gone. Some analysts continued to think that until AAPL eliminated the subscription model for the iPhone, unleashing a huge upside in realized earnings.
What happens when iPhone sales mature and growth stalls-- will something else fill in the hole? What other markets could AAPL enter where the synergies would remain? What will the next disruptive product be in their current markets? Will they squander their cash? Will key talent retire before new blood can begin to make a change?
These things are true for all middle-aged companies.
Consider this, in Wall Street's obsession with "Growth", they forget that for a company to truly succeed, it doesn't need to "win a game". What if Apple completely stagnated? What if they grew at a 0% pace? What would that mean? I'll answer: Technically it would mean that they'd STILL be making money hand over fist, they'd STILL sell massive amounts of products to superbly happy customers, they'd still be amassing massive amounts of cash, they'd still be generating more revenue and profit than any other company out there, and they'd still have a Dividend.
Consider that AMZN has a 190 P/E (stupid) and DECREASES every quarter in "Growth", and how does Apple going in a straight line sound now?
Point is, even if AAPL stagnated, they still deserve a higher P/E ratio than they have now, as they'd still be making cash hand over fist and dominating. Why do people correlate slowing growth with no profit, or with "going out of business"?. If you don't agree, then you must not agree with any companies valuation on the market. The fact that AAPL is so successful, and growing not only steadily, but ACCELERATING and growing DOUBLE every quarter, is SO brushed aside by spoiled Wall Street expectations toward Apple, it's ridiculous.
Quote:
Originally Posted by Godzilla
Thing about the valuation is this: Since the beginning of "AAPL time", people have freaked the stock out of a high valuation. All the while, the company *Accelerates growth every year, i.e every year it raises the bar and gets richer, it grows even more*. Therefore, AAPL has never had a fair valuation, because people have constantly said "how can it maintain? I don't understand the company/nobody has ever done this/therefore I say it deserves a low valuation".... all the while, the company has soared.... but the fear about "growth" sticks to its ideologies, and doesn't listen to the company, doesn't watch the company prove them wrong over and over and over and over.... etc. etc. etc. etc. again.
People will misunderstand the company and be fearful of its uncharted territory (it is literally writing the rule books as it goes along, the pages ahead are blank) forever it seems. My prediction is that P/E will eventually ACCELERATE when the company matures and growth matures yet sustains. That's how weird Wall Street is. Fundamentals will always catch up one way or another, and I think it will be when Apple proves that it doesn't need to grow 100% year over year, yet is still "alive and kicking", and still doing what it does well, that Wall Street gives it a more generous P/E. As of now, the stock will accelerate with the company performance, but Wall Street can't keep up with the companies performance, and complicate, manipulate, and stupify things.
I also think that Wall Street is begging for a Stock split. And with how Tim Cook has showed SOME recognition to W.S, I think it's in the cards, they're just waiting until they might "need it". I know there are lots of pro's and con's, but I think a split will knock out one big irrational/amateur knock against it ("It's too expensive!.... I don't know wtf I'm talking about"!
People can freak out, sure, but you have to look at the scale of growth that they are looking at now. Growing 100% YOY when you are $1 billion dollar company, or even $20 billion dollar company is one thing, doing that at $500 billion is a feat of an entirely different magnitude. As I mentioned before, in order to maintain that sort of revenue/profit margin, you need products which are:
1) high margin
2) replaced fairly often
3) have a broad worldwide user base
There's another company that doesn't grow 100% YOY but does grow 20-30% in a very stable way. Their P/E is 10 and their name is Microsoft. High P/E ratios are typically reserved for companies who can grow exponentially, not linearly. (I'm not a huge fan of P/E ratios anyways) If apple can produce another disruptive product, I completely believe their growth rates can continue, but because of their current size, I think this will be a difficult task. They've benefited greatly from the burgeoning Chinese market and other BRICs countries, but with the global economic picture looking dimmer, and the number of potential customers they have shrinking, its just going to be a difficult task. Time will tell
My general feel, or prediction, is that Apple will continue to have breakneck growth for another year or two before settling down to linear growth/their next disruptive product.
Quote:
Originally Posted by benjaminm3
My general feel, or prediction, is that Apple will continue to have breakneck growth for another year or two before settling down to linear growth/their next disruptive product.
Hey, sounds like a company worthy of a very high P/E ratio right there, especially when considering its the the worlds most successful company already.
Quote:
Originally Posted by Godzilla
Consider this, in Wall Street's obsession with "Growth", they forget that for a company to truly succeed, it doesn't need to "win a game". What if Apple completely stagnated? What if they grew at a 0% pace? What would that mean? I'll answer: Technically it would mean that they'd STILL be making money hand over fist, they'd STILL sell massive amounts of products to superbly happy customers, they'd still be amassing massive amounts of cash, they'd still be generating more revenue and profit than any other company out there, and they'd still have a Dividend.
Consider that AMZN has a 190 P/E (stupid) and DECREASES every quarter in "Growth", and how does Apple going in a straight line sound now?
Point is, even if AAPL stagnated, they still deserve a higher P/E ratio than they have now, as they'd still be making cash hand over fist and dominating. Why do people correlate slowing growth with no profit, or with "going out of business"?. If you don't agree, then you must not agree with any companies valuation on the market. The fact that AAPL is so successful, and growing not only steadily, but ACCELERATING and growing DOUBLE every quarter, is SO brushed aside by spoiled Wall Street expectations toward Apple, it's ridiculous.
Valuations and extreme P/Es are based on growth potential, not the size of the cash hoard. Would you buy a company at 50x their annual earnings if they had flat growth? I thought not.
Quote:
Originally Posted by Godzilla
Hey, sounds like a company worthy of a very high P/E ratio right there, especially when considering its the the worlds most successful company already.
I think I need to clarify, breakneck for apple is 50-100% earnings growth. smaller companies can do many multiples of that. Betting on future disruptive products is a very speculative thing to do, especially when you're talking about investing large sums of money.
Quote:
Originally Posted by benjaminm3
Valuations and extreme P/Es are based on growth potential, not the size of the cash hoard. Would you buy a company at 50x their annual earnings if they had flat growth? I thought not.
My point however, is that plenty of companies get valuations from Wall Street that are significantly higher than AAPL's, and these companies either maintain flat growth, or decrease profits and/or revenue every quarter. This all exists, be it rational or not, yet people act as if AAPL even slightly can maintain its massive current performance, it's worthy of a non existent P/E.
AMZN is the perfect story of a broken system.
Do a stock screen for companies with 200%+ earnings growth, you might be surprised how rare it is, except with margin expansion combined with dramatically increasing revenue. It might work for companies with no marginal product cost, but that is about it.
AAPL today is a good value, if that is how you choose to invest. If you play momentum, you want to wait to get in until after it turns.
But, all Europe can do for Apple is provide a strong growth source when things are sorted out. Today it isn't a critical part of their earnings.
Exactly. Let's look at what P/E means.
There are two components:
1. Investors are willing to invest money in exchange for getting a return on that investment. It's like putting money into a bank or into a bond. If you put the money into a bank, you will accept 2-3% return because of the safety. For a bond, you will accept 5-7% return. If you put the money into a stock which is earning a profit, that profit is your return - which you recover when the return is saved, reinvested, or distributed to shareholders).
2. Investors are willing to pay additional money in exchange for the expectation that the stock's return will grow over time. When you have a rapidly growing stock (or a stock that the investor expects to grow), the investor will put money in in the hopes that they will receive money in the future. Because of the risk, the returns need to be significant. (LQMT is an example. They've lost money every year so far (except possibly the year that Apple paid a few million dollars for rights to use the product), yet they have enough investors to make the market cap millions of dollars - even though income is negative. The investors think that they will hit it big in the future and are willing to take that risk.
Similarly, if a company has negative growth, investors will be less likely to invest than on the simply return principle outlined in #1. So the P/E will be lower than the current earnings would suggest.
What does that mean for Apple? Simple. The market as a whole is trading at a P/E of 17 or 18. That means that if your company is growing as fast as the average Wall Street company, the shares should trade at around 17 or 18 times the earnings. That says that the market has determined that a 6% return is about right for stocks - on average, covering the evaluation in #1 above. If the market believes your stock is growing at faster than the average company, you should be able to add a component for #2, so your P/E should be greater than 17-18. If your stock is growing slower than the market average, you will subtract a 'growth premium' per #2 above and P/E will be lower than 17-18.
Apple is trading at around 13 (less after you back out the cash). Is it overvalued or undervalued? No one knows. The only way to know will be to project yourself into the future to see what Apple's future earnings are. However, the MARKET is saying that they expect Apple to grow at significantly slower than the average of the stocks on the exchange. Since most companies are growing at no better than inflation, that means that the market is predicting Apple will actually decline in profits over the coming years.
So, if you believe that Apple's profits will significantly decline relative to the market, then you would conclude that Apple is fairly priced.
If you believe that Apple will grow at roughly the same rate as the market (a few percent for inflation) over the next few years, then you should expect Apple to return to the market average P/E of 17-18, which means that Apple is a modest buy.
If you believe that Apple will grow faster than the market, then its P/E should be higher than 17-18, so it becomes a strong buy.
The market has made its position known. I happen to disagree - as does Zaky. I don't see anything that suggests that Apple's profits are going to decline in the near future. Even if you think that there's no 'next big thing' on the horizon, it seems to me that Apple's business model should allow them to grow at least as quickly as the rest of the market.
Quote:
Originally Posted by jragosta
Is it overvalued or undervalued? No one knows. The only way to know will be to project yourself into the future to see what Apple's future earnings are. However, the MARKET is saying that they expect Apple to grow at significantly slower than the average of the stocks on the exchange. Since most companies are growing at no better than inflation, that means that the market is predicting Apple will actually decline in profits over the coming years.
So, if you believe that Apple's profits will significantly decline relative to the market, then you would conclude that Apple is fairly priced.
If you believe that Apple will grow at roughly the same rate as the market (a few percent for inflation) over the next few years, then you should expect Apple to return to the market average P/E of 17-18, which means that Apple is a modest buy.
If you believe that Apple will grow faster than the market, then its P/E should be higher than 17-18, so it becomes a strong buy.
The market has made its position known. I happen to disagree - as does Zaky. I don't see anything that suggests that Apple's profits are going to decline in the near future. Even if you think that there's no 'next big thing' on the horizon, it seems to me that Apple's business model should allow them to grow at least as quickly as the rest of the market.
There's also the thing about "Nobody seems to understand Apple" or "There's stocks, bonds, and Apple", basically the idea that nobody, absolutely nobody, can predict anything of Apple when it comes to their stock price.
As it is there are only two external factors driving this down:
1. Facebook IPO, where 1/3rd of the shares sold were from hedge funds.
2. PIIGS saber rattling.
Yes Apple is exposed to Europe, but the EUR-USD dropped 10 cents/dollar back in November, and it dropped another 3-5 cents in the last week, the Greeks are doing bank runs, so the picture over there looks grim, with everyone predicting Greece will exit the Euro. So if most of Apple's profits are in Euros because of tax loopholes, then it's losing money (In USD value) just by virtue of having done that.
Quote:
Originally Posted by enature
I see iOS fatigue on the horizon. Multiple icons drain your focus. Plus perennially unreliable syncing. Add to that a tiny 3.5” screen and no wonder Angry Birds, which requires rudimentary finger gestures, is the king.
The time is ripe for a mobile device with a bigger screen, a UI that steers your focus toward creating and editing meaningful content rather that distracting you with colorful entertainment icons.
Unless Apple ups its game soon, I see trouble. Competitors, while being at a disadvantage due to non-integrated software and hardware, are not sleeping.
iOS fatigue? Huh? Your objections to iOS are just fantasy imho.
The one problem I have always had with Apple's iPhone business plan is "one phone per year". So far it's been working out for them but, as competitors bring out other compelling products, we may see a crack in Apple's wisdom of OPPY. Actually I think we saw that crack last year in Apple's 2011 4th fiscal quarter (and this year I'm waiting to see it even earlier in Apple's 2012 3rd fiscal quarter) when we saw a substantial drop in iPhone sales. I think this opens a window of opportunity for Samsung and others... a weak spot that others notice and can use to their advantage.
Of course, my problems with Apple's OPPY model could also be fantasy.
We'll see.
Quote:
Originally Posted by island hermit
iOS fatigue? Huh? Your objections to iOS are just fantasy imho.
The one problem I have always had with Apple's iPhone business plan is "one phone per year". So far it's been working out for them but, as competitors bring out other compelling products, we may see a crack in Apple's wisdom of OPPY. Actually I think we saw that crack last year in Apple's 2011 4th fiscal quarter (and this year I'm waiting to see it even earlier in Apple's 2012 3rd fiscal quarter) when we saw a substantial drop in iPhone sales. I think this opens a window of opportunity for Samsung and others... a weak spot that others notice and can use to their advantage.
Of course, my problems with Apple's OPPY model could also be fantasy.
We'll see.
I expect that we'll see Apple increase the pace to more like 3 quarters per phone for that very reason. Apple isn't dumb, they don't want to open the window for competitors, so if it doesn't happen this year (I definitely think there's a chance of an early Autumn launch) then it should happen next year.
Quote:
Originally Posted by cameronj
I expect that we'll see Apple increase the pace to more like 3 quarters per phone for that very reason. Apple isn't dumb, they don't want to open the window for competitors, so if it doesn't happen this year (I definitely think there's a chance of an early Autumn launch) then it should happen next year.
My thinking is that Apple could update the 4S with a new processor, more RAM, 8 track connector or something else at the same time (or earlier) as the 6th gen release.
Quote:
Originally Posted by island hermit
My thinking is that Apple could update the 4S with a new processor, more RAM, 8 track connector or something else at the same time (or earlier) as the 6th gen release.
I think we saw last year just how silly that idea is.
Quote:
Originally Posted by Tallest Skil
I think we saw last year just how silly that idea is.
I think you are being silly.
I don't even know where to begin.
First of all, with respect to 90% of the posters, I'm immediately reminded of Kramer and Jerry. And that's Cosmo Kramer, not Mad Money's Jim Cramer who is, in large part, single-handedly responsible for so many being armed with pithy sound bites that they don't know how, when, or where to correctly apply because the lack the fundamental, underlying expertise that someone like Jim Cramer has.
Back to Kramer and Jerry:
Kramer: It's a write-off for them.
Jerry: How is it a write-off?
Kramer: They just write it off.
Jerry: Write it off what?
Kramer: Jerry, all these big companies, they write off everything.
Jerry: You don't even know what a write-off is.
Kramer: Do you?
Jerry: No, I don't!
Kramer: But they do. And they're the ones writing it off.
Jerry: I wish I had the last twenty seconds of my life back.
Seinfeld: The Package
First of all, there are many different reasons for trading in equities and different ways in doing so. The factors that you evaluate are different in each case, yet I see them being freely mixed in the discussion here.
Looking at how "The Market" prices a publicly held stock relative to the stock in other publicly held companies generally involves a short-term view of the collective market perception of how buying and selling opportunities in one specific equity compared to the marginal opportunities to invest a finite amount cash in one or more other equities. This analysis and investment decision is typically made with a specific time horizon in mind and it is one that is often of a relatively short-term nature. For example, "AAPL looks relatively undervalued compared to XYZ, therefore I'm going to buy 10,000 shares of AAPL and then sell when they're up $10 or in 2 weeks, whichever comes first." This is generally a view that may be formed based upon the available point-in-time information or from a basic extrapolation of recent trends.
(And before anyone jumps on my use of "margin," please make sure you first understand the difference between the economics concept of the margin with respect to the deployment of a specific, incremental amount of capital and the trading concept of using margin, or in other words, making a leveraged purchase of a traded instrument.)
This contrasts to fundamental analysis of expectations of future cash flows that a particular company will generate. These pro forma cash flows are modeled based upon scenario analysis of specific expectations regarding factors like market position, competitor analysis, pricing power, buying power, product pipeline, reputation, operating margins, liquidity, leverage, management, litigation, cost of capital, environmental risks, labor risks, market disruption, and so on. This is the type of in-depth analysis that is done by equity analysts at, for example, Wall Street firms such as Morgan, Citi, JPMC, Piper Jaffrey, Sterne Agee, etc.; as well as by the analysts at the bond rating firms such as Fitch and Moody's; by credit analysts at commercial and investment banks; and by M&A teams, VC firms, etc.
The objective in this fundamental analysis is to build a baseline scenario of 3-year cash flow projections, which are based on proprietary P&E and balance sheet models. This cash flow is then used as a basis to formulate buy/sell recommendations and target stock prices; credit ratings and default probabilities; valuations for mergers, acquisitions, and VC-type investments; etc.
Specific factors that might be relevant with respect to formulating a cash-flow forecast for Apple Inc might include:
There are additional considerations as well. jragosta's reference to "the market as a whole" and implications regarding growth rates, earnings, share price, etc. is off-base. There is no "market as a whole," or at least not in any way that has any bearing or analytical value with respect to the market price of Apple's common stock. What is relevant is market or industry sectors, not to mention geography, listing exchange, etc. This is the reason why there are utilities indexes, transportation indexes, etc. so as to facilitate comparison of like stocks because that's where comparison of growth rates, margins and so on are actually relevant. Is there any meaning in comparing Apple to, let's say, Nike or Coca-Cola, or a major pharmaceutical company? The short answer is no. The longer answer is that if an investor is looking for the best return/reward on the investment of their marginal dollar and is not taking anything else into consideration such as diversification, growth vs. dividend, and so on, and they expect a better return on a short-term investment in Apple than in Berkshire Hathaway, they may choose to invest that marginal dollar in AAPL. But that is completely contrary to the long-term view of an investment such as Warren Buffet's moderately successful (sarcasm) approach at Berkshire Hathaway. He has done amazingly well by identifying investments based upon developing a long-term view of the unique fundaementals of a specific company.
Another factor that is uniquely relevant to Apple is that no company has, or ever has had, composed such a significant component of the total market cap across an industry, an exchange, an index, all publicly held large-cap stocks, or what have you. Apple being such a Goliath has very significant consequences in terms of it's ability to move market indices such as the S&P 500. It is the most widely held equity and is a significant component in many, if not most, mutual funds. That affects the buying decision of fund managers, especially those managing index funds where they need to continue rebalancing their holdings. AAPL, I would believe but am not certain, is a very liquid stock but the ability to sell-off or buy a large block of shares will be constrained by both availability and the market impact of a large number of shares changing hands.
Further, the law of large numbers, which has been mentioned previously in this thread, is very relevant to Apple. The larger something is, the harder it is to make signficant changes in its size; and this is particularly true for companies with sizable revenues, earnings, market share, and/or market cap. If a company has 2% market share, it is far easier to double that than a company that has 20% market share. And obviously extrapolating from that, a company with an extremely large market share would be essentially constrained by its ability to actually influence the overall growth of the entire market rather than simply its abillity to capture a larger portion of market share from its competitors.
I quoted jragosta at the top because I was motivated to comment specifically regarding his referring to a comparison of Apple to some mythological "average" publicly held company, but obviously my post is directed at most all of the preceding posts in this thread.
Let the attacks begin...
BTW, if you want to make personal attacks, don't -- I can respond better than you can heckle. If you're not sure what you're talking about, please remember Abraham Lincoln's famous words, "It is better to remain silent and be thought a fool, than to speak and remove all doubt." If you know what you're talking about and can frame a reasonable and well articulated counter-argument, then bring it on ;-)
(Full disclosure: I don't have any direct position in AAPL, nor do I intend to make one in the forseeable future. I don't work for Apple or any of its competitors. I haven't been a banker for a very long time and I don't hold any type of analyst position.)