Apple shares top $400 for first time in company history; Yet P/E still lags behind

Tue, Jul 26, 2011

Analysis, News

Following Apple’s stellar earnings announcement last week, shares of the company have continued to trend upwards, reaching all-time intraday and closing highs on consecutive days.

At the close of the bell on Tuesday, shares of Apple were up $4.91 to $403.41. Earlier in the day, shares reached as high as $404.50 a share.

Apple is fast approaching Exxon Mobile as the most valuable company on the planet. Whereas Exxon’s market value currently checks in at approximately $415 billion, Apple is pulling up the rear with a market value of $373 billion, easily edging out Microsoft in the third position with its $236 market value.

Still Apple’s current P/E ration is surprisingly low at about 15.96.

Matt Richman asks a logical question:

If a company’s P/E ratio is supposed to be indicative of its growth prospects, then why is Netflix’s P/E ratio more than 4.5 times higher than Apple’s when Apple is growing its bottom line more than twice as fast as Netflix is? And why does Amazon, who is expected to report a 42.62% year over year increase in revenue later today, have a P/E ratio that is more than 5 times Apple’s when Apple’s top line is growing nearly twice as fast?

Tackling that very question, Daring Fireball’s John Gruber theorizes that Wall St., much like a parent, refuses to see that Apple has grown up and is no longer the company on the verge of bankruptcy that it was back in 1997 nor the 1-trick pony some analysts thought it was as late as the mid-2000s.

“The stock is weighed down by old impressions of Apple as a smaller company with niche appeal,” Gruber writes.

And in many ways, Apple’s undervaluation on Wall St. is a reflection of how analysts are still unable to give Apple it’s proper due. For whatever reason, Apple continues to deliver substantial and impressive results built upon equally impressive and popular products it sells for unusually healthy margins. To that, Wall St. scoffs and asks, “Yeah, that’s great and all, but what else do you have up your sleeve?”

All the while, other tech companies are seemingly given credit for merely trying to compete in the same market Apple helped forge.

Another factor is that Apple has consistently delivered blowout earnings that have completely caught analysts on Wall St. flat footed. To a certain degree, it’s only natural to assume that a company as big as Apple can’t possibly continue to deliver the kind of earnings growth typically associated with companies orders of magnitude smaller. When revenue comes in at over $25 billion, as it does with Apple, significantly improving upon that becomes proportionately more difficult.

With Apple now over the $400 barrier, $425 may be around the corner. Indeed, some analysts are already seeing $450 and $500 sooner than later.

If Apple continues to deliver breakthrough products and unprecedented earnings growth, we can only hope that Apple’s P/E will be a true reflection of its potential and not a reflection of the biases and lack of information that unfortunately seem to plague Wall St. more often than not.

Apple investors are undoubtedly hoping that the recent run up in share price is just the beginning of a trend that arguably should have began months ago.


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