In 2007 it was trading for nearly 50 times earnings. Today it’s 10. What happened?
Perhaps the most succinct commentary on Leonid Kanopka’s naive claim that Apple AAPL is a “bubble ready to burst” (see “A few fries short of a Happy Meal“) was Nicu Mihalache’s plaintive response: “Do you know what P/E is?”
The price-to-earnings ratio, as every trader knows, is the simplest way to gauge how the market values a company. A high P/E — like the nearly 50 times earnings investors were paying for Apple four years ago — is a signal that the market has high hopes for a company. A low P/E — like the current 10.05 forward earnings ratio — is a vote of no confidence.
There are more sophisticated ways to value a company. Asymco’s Horace Dediu, who produced the chart above, favors P/E/tG (price to earnings to trailing growth). But his P/E chart, which shows Apple trading in a band between 35 and 45 times earnings between 2006 and most of 2008 and between 15 and 25 times earnings since 2008, tells you most of you need to know. In a piece posted Thursday entitled The Thermodynamics of Apple’s Share Price Dediu writes:
What’s going on?
Building on a report Andy Zaky issued Monday on Bullish Cross showing that Apple is now the most undervalued large cap stock on the S&P 500, Reuters blogger Felix Salmon surveyed the Apple nay-sayers’ arguments and came up with 8 reasons Apple’s shares are so cheap. To his list, which runs the gamut from “it’s run out of buyers” to “technical analysis astrology,” I would add two more:
One from Dediu who summarized his takeaway from a series of meetings with buy side analysts like this:
The other comes from reader Jim Neal in an e-mail entitled “Why I’m happy with Apple’s P/E”: