AAPL: why stuck at single-digit PE?

Some interesting facts here.

Relatively, AAPL is under-priced as a stock. But opinion and momentum say otherwise. So much for perfect markets.

Does it really have less growth potential than GM or Microsoft? Or Google?


Eric Bader



I present you with this question: Does Apple (AAPL) deserve to carry a single digit P/E? At its current price, Apple is trading at 10.09x TTM earnings and about 9x forward earnings. At its TTM multiple, Apple is trading at a 79.1% discount to the market … yes, a 79.1% discount. So, I repeat does Apple deserve a single digit P/E? In its current state, it certainly looks like the market thinks so (a 1.0% drop in price will amount to a P/E of 9.99x assuming a share price of $445). Do we truly believe that Apple has no growth prospects (see Apple: Zero Growth … Really!)?

Apple’s share price is beaten, bruised, and hurting. Market sentiment swayed from, “this could be a $1,000 stock (P/E of 22.7x)” and trading at $700 to Apple its current share price of $445. Apple’s P/E is lower than companies such as IBM (14), CSCO (12), GOOG (26), and my favorite, AMZ (N/A). Does Apple deserve this? Some would say yes, others no. In the subsequent paragraphs, I will establish some criteria to help you determine if its current price multiple is justified.

Market Share (Mobile Phones): According to a recent survey by ComScore, “Apple ranked as the top Smartphone manufacturer with 37.8 percent OEM market share [in the U.S.], while Google Android led as the #1 Smartphone platform with 52.3 percent platform market share [in the U.S].”1 These numbers do leave out an important piece of information; if you look at the table presented by SCOR below, one can see that while Apple not only leads the OEM Smartphone subscriber market, it has increased its market share by 3.5 percentage points in January versus 1.9% by Samsung with HTC and Motorola losing market share.

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However, the worldwide market share numbers tell a different story. Samsung is clearly the worldwide leader in mobile phone cells, taking Nokia’s position as number one and far surpassing that held by Apple. Although once again, Apple is not losing market share, instead it is gaining it. This is apparent in a survey done by Gartner,2 which shows that Apple has increased its market share 2.5 percentage points from year-end 2011.

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Market Share Tablets: In addition to Apple’s strength in the mobile phone market, Apple also displays its leadership in the Tablet market. As the chart from ComScore below displays, Apple continues to maintain market leadership in this area. Apple controls 45% of the tablet market followed by Amazon with a little over a quarter of all tablets in use. While Samsung has and is gaining market share, Apple maintains a strong lead with nearly 6.5x the market share of Samsung.

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Relative Multiples: As previously established, Apple maintains a low P/E multiple, but how does it stack up against its peers? In looking at two separate groups of companies, as well as its own historical P/E, we will find that Apple is relatively underpriced.

  1. Industry Peers: With Apple’s footprint across so many different industries, it is difficult to establish a clear-cut group to reference, so for ease of comparison, I have chosen the groups that Yahoo! Finance established to quantify my data. The results show that Apple ranks in the 22nd percentile in this peer group. Using the P/E multiple established by the median results in an implied share price of $721 (agreeably high), albeit still at a lower P/E than the overall market. Alternatively, using the 37.5th percentile P/E (14.46x) implies a share price of $638 (this is more like it). Further, simply by taking the P/E represented by the 25th percentile (10.87x) establishes a price of $479, an increase of approximately 7.6% from its current level.
  1. Top 10 S&P 500 Holdings: Apple is one of the top ten holdings in the S&P 500, so why not see how Apple stacks up against the others in the group. Not too surprising, Apple falls to the bottom of the pack-once again in the 22nd percentile-only with ExxonMobil (XOM) and Chevron (CVX) below. In this situation, the results are even more staggering; by using the 25th percentile’s P/E (14.68x), Apple’s share price becomes $647, an increase of approximately 45%.
  1. Apple’s Historical P/E: Since 2004, Apple’s P/E has ranged from 9x – 98x. While there is no reason to suggest that Apple should trade anywhere near 98x, it is trading at the lowest numbers since early 2009 when the entire market was in disarray. In looking at the past 5 years low and high P/E multiples a range of 11.4x – 22.8x is established. This in turn establishes a valuation range of $1005 on the high side (very high side!) and a more realistic number of $503 on the low end. Using the $503 estimate generates a return of about 13%.

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Zero Growth: In a previous article, I wrote that Apple is currently priced in the market for zero future growth, which continues to be the case (seekingalpha.com/article/1247181). In addition, the market also prices its Present Value of Growth Opportunities (PVGO) at about $4.00 per share (discount rate of 10%, $445 share price, and earnings of $44.10/Share). Apple’s past ability to innovate and reshape popular culture should garner confidence in a PVGO larger than $9.00 per share.

Conclusion: Apple has helped reshape the landscape in which we live. It has been at the forefront of popular culture and technological innovation for well over a decade. Thanks to Apple, we no longer carry giant boxes clipped to our belts to listen to music, phones that only make calls, and computers the size of suitcases (I am writing this on a tablet smaller than a notebook). Apple is a well-diversified company with an established footprint across the technology sector entering our homes in the form of computers and our pockets with miniature computers that double as phones. Thanks to the iTunes music store, we no longer need to travel to buy music, books, or movies; instead, we can purchase any or all from our mobile device wherever we may be. Yet, we believe right now that Apple can no longer innovate, can no longer add to its stable of products, and will not wow us again.

Perhaps that is just what Apple needs, a new product, an innovation to boost the share price. With the giant momentum over the past seven months, we now believe that Apple no longer has growth prospects and nothing in the pipeline. I find it hard to believe that Apple has nothing to offer us in the near future, whether it is a watch (I think that is just plain weird, but … okay), a T.V., or perhaps something none of us even dreamed of yet. What I can say is this, there is someone sitting in a Cupertino lab throwing spaghetti at a wall, something will stick, and I imagine it will WOW us. Unfortunately, for those of us that are long the stock, I think that is what it is going to take to drive the price back up to an appropriate level. In addition, as a friend of mine said, “Apple will be stuck in limbo until it wows the peanut gallery” and I could not agree more. Alternatively, perhaps Steve Jobs will pull a rabbit out of a hat from his grave.




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