The world’s largest company, Apple (AAPL) has been smashing one record after another. But the one record it smashed this year maybe the most telling of all. The iPhone alone generates more revenues than all of Microsoft (MSFT) Corporation. That includes Windows, Office, X-Box, Hotmail, Bing, Windows Live, Windows mobile, and a gazillion other things that MSFT produces. A single product that did not exist 5 years ago makes more sales than all of MSFT. That is simply an astounding fact. (IPhone sales chart – courtesy www.theatlantic.com)
It’s no surprise then that the AAPL stock price has reached stratospheric levels. The stock is up about 60% since Jobs passed away, is trading at around $670, and has a market cap of $625B. These are massive numbers for sure. But simply looking at the price of the stock is not enough. AAPL trades at a trailing 12-month PE (Price to Earnings ratio – the most widely used metric for valuation comparisons) of about 15. This multiple is in line with a “value” stock as opposed to a “growth” stock. But if you look at these graphs below (courtesy www.fool.com), AAPL is hardly a Value stock. Growth stocks will kill to have a growth chart like Apple. (Click to enlarge)
By comparison, Google (GOOG), and Amazon (AMZN) are valued as Growth stocks. GOOG trailing P/E multiple is 22, and AMZN trailing P/E is a whopping 301. Even lowly Facebook (FB) has a P/E of 66, and that’s after getting whacked by over 50% since its IPO. The AAPL P/E multiple is not something new, it has always traded at a multiple between 12 and 16. Why is this happening, even though it has demonstrated explosive growth over the past few years and continues to do so. If AAPL trades at the same multiple as GOOG, it would surpass the lofty $1 Trillion mark. Doesn’t AAPL deserve to trade at a higher multiple ? Are investors afraid to value it as a growth stock ? Or is the $1T number psychologically terrifying ? This is really strange, and I’ve not seen any good explanations.
Sure, AAPL may not grow indefinitely as it has in the past. But it has a promising product lineup including the iPhone 5 as well as the much anticipated iTV. And after winning the legal ruling against Samsung, AAPL has sent a clear message to other mobile phone vendors that it will protect its iPhone business at all costs. If anything, its widened its competitive gap by fiercely protecting its intellectual property. Analysts seem to think AAPL is priced for perfection, i.e. if the iPhone 5 does not have a blockbuster launch this month, AAPL stock will crash. If it does, it would be a great move to buy AAPL Call Options with an expiry of 1 year or more (barring overall market risk, of course). Looking at it strictly from a pricing and valuation metric, AAPL stock is priced very inexpensively.