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What price for an Apple?

Ken Brown, MBA Programme Director

Faculty Blog

Apple shares have had a rough time of late.  Apple’s stock peaked at $705.07 in September, since then they have tumbled by over $200 to close at $501.75 yesterday (Monday 14th January 2013).  A fall of 28.8%  (***Tuesday 15/1/13, market opening prices, Apple are down another $10 at $490).  We have a bear market in Apple shares. The stock market value of the company has fallen from $661bn to $472bn.  This is a loss in stock market value of $189bn.  That $189bn is more than the market value of all but the largest company in the UK; HSBC, valued at $201bn on Monday.

The $189bn that has gone from Apple’s market value is an astonishing number.  Another astonishing number is the profit that Apple is making.  In the 12 months to the end of September it made $41.7bn in net income.  If the company is valued at $472bn on the stock market and it has earned $41.7bn in the past 12 months, it means that it is valued at 11.3 times its earnings (this is the Price Earnings ratio (P/E) of Apple).  That P/E ratio puts it ahead of Microsoft, its old rival, on 10.8 times earnings, but Microsoft hasn’t been growing for years, Apple still has loads of gas left in the tank.

The consensus view on Apple from analysts is that they will make $48.78bn this year and $57.27bn in the next year.  That prices Apple shares on 9.7 times current year earnings and only 8.24 times next year’s earnings.

These are very low P/E ratio numbers.  They say the market is never wrong, so why are Apple shares so low?

Maybe the market is worried about the impact of Samsung’s wider range of phone and tablet products and keener product prices.  Samsung is growing very fast just now and has a very large share of the smart phone market.  So their shares must be on a high rating, yes? Well no, they are on a price earnings ratio of 11.5, not much different to Apple’s.

If the market was worried about Apple losing market share to Samsung, you would expect Samsung shares to be more highly valued, or vice versa.  But both companies’ shares are trading at a discount to the stock market P/E ratio (16.4).  Apple and Samsung at these levels are not growth shares.  Could the worry be over what Google might do, with their cheaper phones, tablets and laptops?  Google are priced at $723 and a P/E ratio of 22.7, which is double that of Apple and Samsung.  The market is expecting growth from Google, but not from Apple or Samsung.

Who would you put your money on?

Is the Apple valuation wrong?