Actually, to clarify, what I said (implied) was this. The nominal (expected) value of a stock is nothing more, nothing less than a function of two fundamental variables: nominal expected future cash flows (typically proxied by earnings by analysts) and the market's discount rate (expected return) for the stock, taking into account its expected growth prospects (typically proxied by the P/E ratio by analysts, which, it's easy to show, is exactly the same as {1÷[rE ? g]} where rE is the expected return on the stock and g is the expected long-run growth rate).
That's not what you said. You said:
"That makes zero sense. Value is value. Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth. So let's use your new position:
Value is a function of two fundamental variables - future cash flows and markets discount rate (which you admit is proxied by the P/E ratio).
The future cash flows will depend strongly on inflation. Market discount rate will not (expected P/E ratio remains fairly constant over time and is independent of inflation). Therefore, as inflation occurs, the first variable goes up and the second remains relatively constant. So inflation causes the market value of a company to go up - which is the exact opposite of what you said the first time.
Since, at any point in time, the market values a stock based on its expectation of future evolution of fundamentals -- and presumably, people buy and sell based in their expectations -- the market price that we observe is an equilibrium (however temporary) based on all the information that the market has up until that point. In other words, in a well-functioning market, there is little distinction between realized and expected prices (referring to an earlier point of yours).
Actually, I didn't make such a point - at least not in this thread. It's also irrelevant. We don't have to talk about future prices at all - we can talk about prices yesterday vs 10 years ago without getting into differences between realized and expected prices. The fact is that the market valued Microsoft at $650 B some time ago. They value Apple at $650 B today. Since there has been significant inflation during that time, Microsoft actually had less value.
Now, one could argue that one needs to correct the P/E by the change in the market's P/E (or the percentage of the entire global market cap that is due to each company). However, P/E ratios and total market cap are not all that different today than they were when MS hit $650 B, so the effect is smaller than the inflation effect.
Now, if you're suggesting that $650B will allow you to consume less today than $650B in 2000, that is a completely valid point and one I totally agree with. But that is a different argument.
No, it's part of the same argument. Apparently, the concept of 'inflation' escapes you.
All this aside, it is (as has been discussed many a time in this forum) silly for AI to even bring up MSFT's "$650B" as a point of comparison to Apple since, by any reasonably metric and by the substantial benefit of hindsight (not just with MSFT, but the market as a whole at that time), that price reflected a bubble. Apple's valuation is still anchored in very reasonable expectations of the evolution of fundamentals.
The price MAY HAVE reflected a bubble, but it's irrelevant. The issue is which company had a greater market cap - not WHY one company had a greater market cap.
Hey Anant, have you tried plugging in some experimental values into the formula and solving for long-term growth rate? I have been baffled by AAPL's low P/E for a long time, and would be
interested to know what assumptions the market is making for Apple's growth.
That's really quite straightforward to do. Apple's forward P/E is between 12x and 14x depending on which analyst you look at (and even that includes its cash).
Let's err on high side, and say it's 14x.
If Apple's rE = 14% (which is probably much higher than what it actually is; but I am penalizing Apple here, just to be on the safe side), that implies a "g" (long-run annual expected earnings growth rate) of 7%.
Considering Apple's current rate of earnings growth, even if the current growth where to fade rapidly in the next, say, six or seven years to no more than the global nominal GDP growth rate from Year 8 to forever, that is on the low side.
If, OTOH, you think that Apple's true risk-adjusted discount rate is closer to 12% (which is what I think it is, perhaps even 11%), we are talking about an implied g = 5% (or even 4%).
You be the judge!
(Edit: Cleaned up some language!)
Thanks for doing that.
Yeah, that is amazing. I don't know what the market is picturing that would knock Apple down that far. Maybe they expect a huge fiasco of a product release pretty soon.
Same here, I can't even sell it, because there's no better alternative to buy
Only reason anyone might want to get out now would be the looming capital gains increase. I'll be holding on through the next president... whoever they may be.
Congrats Apple! Too bad Steve didn't live to see this.
He set them on their current path... one that includes "evergreen" properties that continue to pay over time, instead of let Apple sink into the standard "feast or famine" of product release, feast, development cycle, famine, repeat...
Thanks for doing that.
Yeah, that is amazing. I don't know what the market is picturing that would knock Apple down that far. Maybe they expect a huge fiasco of a product release pretty soon.
Yes, I do find it puzzling how little growth is built into Apple's share price today.
I think it is for a completely unscientific reason (but have no evidence to prove it one way or another): people just can't wrap their minds around the concept of a company with such a high market cap that can continue to grow. There are no other examples one can think of. They use weasely words like "law of large numbers" and such, but I have no clue what they mean.
Anyway, when it falls back to $580 after the fall keynote, Apple will be doomed™ all over again, so it's all cool.
But...that one Chinese company (state-owned PetroChina) ... was only valued at that amount on the Shanghai stock exchange, possibly due to overhyped estimates of its worth by the Chinese government; in the rest of the world it never approached that number or what Apple is now. As for Apple being doomed do you want to hold your breath on that one? I wouldn't.
Hey Samsung Chairman Mr. Lee, are you looking at this news? I bet you will not be able to sleep for a few days. American jury will deliver Samsung another big blow come this Friday. Get ready to spit out huge chunk of cash! Apple will become fatter and fatter....they'll gonna have hard time digesting all that cash. I'm in the middle of persuading my wife to get iPhone 5...because that's the only way I can get my hands on it. Wish me luck fellow Apple maniacs!
"That makes zero sense. Value is value. Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth.
If you can't see that my first statement:
"Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth. "
is exactly the same as the second statement:
"The nominal (expected) value of a stock is nothing more, nothing less than a function of two fundamental variables: nominal expected future cash flows .... and the market's discount rate (expected return) for the stock, taking into account its expected growth prospects ...."
Only reason anyone might want to get out now would be the looming capital gains increase. I'll be holding on through the next president... whoever they may be.
Listed, check. Overvalued by the CPC and the Xinhua News agency (who have a penchant for making absurd claims), also, check.
"SHANGHAI, China — What the Shanghai stock exchange giveth, Wall Street taketh away.
Hours after PetroChina shares almost tripled in value on their first day of trading in Shanghai, they slumped 13 percent in New York after a big investment bank said the stock was overvalued ... Indeed, when measured by earnings, Exxon remains a much larger company. Its $9.41 billion in third-quarter net profit, while down 10 percent from a year earlier, nearly matched PetroChina's net profit of 81.8 billion yuan ($10.8 billion) for the entire first half of the year...."
Comments
That's not what you said. You said:
"That makes zero sense. Value is value. Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth. So let's use your new position:
Value is a function of two fundamental variables - future cash flows and markets discount rate (which you admit is proxied by the P/E ratio).
The future cash flows will depend strongly on inflation. Market discount rate will not (expected P/E ratio remains fairly constant over time and is independent of inflation). Therefore, as inflation occurs, the first variable goes up and the second remains relatively constant. So inflation causes the market value of a company to go up - which is the exact opposite of what you said the first time.
Actually, I didn't make such a point - at least not in this thread. It's also irrelevant. We don't have to talk about future prices at all - we can talk about prices yesterday vs 10 years ago without getting into differences between realized and expected prices. The fact is that the market valued Microsoft at $650 B some time ago. They value Apple at $650 B today. Since there has been significant inflation during that time, Microsoft actually had less value.
Now, one could argue that one needs to correct the P/E by the change in the market's P/E (or the percentage of the entire global market cap that is due to each company). However, P/E ratios and total market cap are not all that different today than they were when MS hit $650 B, so the effect is smaller than the inflation effect.
No, it's part of the same argument. Apparently, the concept of 'inflation' escapes you.
The price MAY HAVE reflected a bubble, but it's irrelevant. The issue is which company had a greater market cap - not WHY one company had a greater market cap.
Quote:
Originally Posted by anantksundaram
Quote:
Originally Posted by quinney
Hey Anant, have you tried plugging in some experimental values into the formula and solving for long-term growth rate? I have been baffled by AAPL's low P/E for a long time, and would be
interested to know what assumptions the market is making for Apple's growth.
That's really quite straightforward to do. Apple's forward P/E is between 12x and 14x depending on which analyst you look at (and even that includes its cash).
Let's err on high side, and say it's 14x.
If Apple's rE = 14% (which is probably much higher than what it actually is; but I am penalizing Apple here, just to be on the safe side), that implies a "g" (long-run annual expected earnings growth rate) of 7%.
Considering Apple's current rate of earnings growth, even if the current growth where to fade rapidly in the next, say, six or seven years to no more than the global nominal GDP growth rate from Year 8 to forever, that is on the low side.
If, OTOH, you think that Apple's true risk-adjusted discount rate is closer to 12% (which is what I think it is, perhaps even 11%), we are talking about an implied g = 5% (or even 4%).
You be the judge!
(Edit: Cleaned up some language!)
Thanks for doing that.
Yeah, that is amazing. I don't know what the market is picturing that would knock Apple down that far. Maybe they expect a huge fiasco of a product release pretty soon.
Quote:
Originally Posted by Tallest Skil
Running a company whose market cap is half of Apple's quarterly revenue.
Comparing market cap to market cap, Apple is just over 28 times more valuable.
Quote:
Originally Posted by Azu Kiposi
Same here, I can't even sell it, because there's no better alternative to buy
Only reason anyone might want to get out now would be the looming capital gains increase. I'll be holding on through the next president... whoever they may be.
Quote:
Originally Posted by Buzzz
Congrats Apple! Too bad Steve didn't live to see this.
He set them on their current path... one that includes "evergreen" properties that continue to pay over time, instead of let Apple sink into the standard "feast or famine" of product release, feast, development cycle, famine, repeat...
Yes, I do find it puzzling how little growth is built into Apple's share price today.
I think it is for a completely unscientific reason (but have no evidence to prove it one way or another): people just can't wrap their minds around the concept of a company with such a high market cap that can continue to grow. There are no other examples one can think of. They use weasely words like "law of large numbers" and such, but I have no clue what they mean.
http://www.theinquirer.net/inquirer/news/2199995/apple-fails-to-become-the-most-valuable-company
Quote:
Originally Posted by Tallest Skil
But… that one Chinese company…
Anyway, when it falls back to $580 after the fall keynote, Apple will be doomed™ all over again, so it's all cool.
But...that one Chinese company (state-owned PetroChina) ... was only valued at that amount on the Shanghai stock exchange, possibly due to overhyped estimates of its worth by the Chinese government; in the rest of the world it never approached that number or what Apple is now. As for Apple being doomed do you want to hold your breath on that one? I wouldn't.
Quote:
Originally Posted by 69ergoo
Hey Samsung Chairman Mr. Lee, are you looking at this news? I bet you will not be able to sleep for a few days. American jury will deliver Samsung another big blow come this Friday. Get ready to spit out huge chunk of cash! Apple will become fatter and fatter....they'll gonna have hard time digesting all that cash. I'm in the middle of persuading my wife to get iPhone 5...because that's the only way I can get my hands on it. Wish me luck fellow Apple maniacs!
Here's wishing you luck.
This was just briefly, post-IPO when few of its shares were available and the price got bid up artificially.
Originally Posted by Radar
…in the rest of the world it never approached that number or what Apple is now.
But it WAS publicly listed, correct?
Quote:
Originally Posted by jragosta
That's not what you said. You said:
"That makes zero sense. Value is value. Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth.
If you can't see that my first statement:
"Inflation is in both the numerator (cash flows) and denominator (cost of capital) in all valuation."
Your new statement is closer to the truth. "
is exactly the same as the second statement:
"The nominal (expected) value of a stock is nothing more, nothing less than a function of two fundamental variables: nominal expected future cash flows .... and the market's discount rate (expected return) for the stock, taking into account its expected growth prospects ...."
... I don't know what to say!
Quote:
Originally Posted by melgross
I don't believe it will drop back to $580, unless the world becomes overly worried about the problems in the EU at the same time.
Try Grexit.
Quote:
Originally Posted by SpamSandwich
Only reason anyone might want to get out now would be the looming capital gains increase. I'll be holding on through the next president... whoever they may be.
Do you have specific plans depends on who win?
Quote:
Originally Posted by Tallest Skil
In 2003, who would have ever guessed!
I did, proud to say it and the haters can't laugh at me no more!
Quote:
Originally Posted by Tallest Skil
But it WAS publicly listed, correct?
Listed, check. Overvalued by the CPC and the Xinhua News agency (who have a penchant for making absurd claims), also, check.
"SHANGHAI, China — What the Shanghai stock exchange giveth, Wall Street taketh away.
Hours after PetroChina shares almost tripled in value on their first day of trading in Shanghai, they slumped 13 percent in New York after a big investment bank said the stock was overvalued ... Indeed, when measured by earnings, Exxon remains a much larger company. Its $9.41 billion in third-quarter net profit, while down 10 percent from a year earlier, nearly matched PetroChina's net profit of 81.8 billion yuan ($10.8 billion) for the entire first half of the year...."
You can read the rest here if you like... http://www.usatoday.com/money/economy/2007-11-04-1494307240_x.htm
FWIW Google has now passed Microsoft too according to Bloomberg
http://www.bloomberg.com/news/2012-10-01/google-passes-microsoft-s-market-value-as-pc-loses-to-web.html
Microsoft's best days may be behind them.