In 2010, Apple will begin including the full sale price of each iPhone sold into its earnings, as opposed to now where Apple defers the cost of an iPhone over a 24 month period. This revenue deferment often results in analysts underestimating Apple’s financial health as its earnings reports don’t accurately reflect just how much money Apple is raking in. Going forward, we can expect to see a bump in Apple’s quarterly earnings, which will also have the effect of lowering Apple’s P/E ratio.
On that note, Jason Schwarz of The Street postulates that Apple’s P/E ratio will sink so low as to make the stock as affordable as its been in over 10 years.
If you’re like me, you don’t care too much about current P/E ratios because they are calculated from past results. The number that really matters is the forward P/E ratio because it is calculated from future estimated earnings. Well, the average forward P/E ratio for Apple since 2003 is 22.48. Any guesses what it is now?
Based on the new accounting rules soon to be put in place, and the 37 billion in cash that Apple has on its books, Apple’s forward P/E is below 13. This stock has not been priced this cheaply since Steve Jobs came back to Apple in 1997.
Schwarz writes that if analysts truly understood the state of Apple’s financial affairs, Apple stock would currently be trading at $263, with the potential to hit $376 by September 2010. And these aren’t best case scenario numbers, according to Schwarz. On the contrary, they “simply reflect the averages.” And lastly, Schwarz sees a best case scenario resulting in Apple’s share price hitting $456. Now that’s a scary thought.