The approach to answering this question is to show how the share price correlates to that growth. The challenge for analysts has been that the company switched from subscription to current accounting for the iPhone (the largest component in its income statement). As they re-stated income and thus earnings, any historic review of P/E or other multiples of Earnings have to also be re-computed.
So this is what I’ve done:
The first chart shows Apple’s price per share (blue) vs. its trailing twelve months earnings (green) and multiples of those earnings (15x and 25x).
To answer, we need a way to look at the valuation of Apple. One way is to plot the P/E ratio over time. That would show how the market perceives the value of the company (i.e. how many years’ worth of earnings is built into the price) The chart below does that.
Click to enlarge
I took the additional steps of plotting the P/E excluding cash from the price to show “P/E Ex cash” in the orange colored line and I also copied the Share price line from the first chart on this one for contrast.
What the P/E analysis shows is that as the stock rose, it’s P/E ratio fell. This means that the “valuation” of the company is quite a bit lower now than it was in 2006 and 2007. In fact, as a multiple of profitability, Apple’s stock is nearly half as valuable now as before the recession.
Since valuation is usually correlated with growth, (P/E is often compared in a ratio with Growth) we need to see whether the P/E in the chart above matches the actual growth of earnings. Fortunately we have just measured growth with the scorecard. Here are the two charts together:
Click to enlarge
To put a finer point on this, I plot the ratio of P/E and trailing growth (P/E/tG) in the brown line below:
The only conclusion I can draw is that the market does not believe that Apple has significant growth opportunities. A P/E of 20 with consistent 70% growth is, to be blunt, damnation. For comparison, Amazon (NASDAQ:AMZN) just reported 16% growth in earnings and was rewarded with a P/E of 68.
Amazon notwithstanding, is Apple an anomaly? Is the disconnect between earnings growth and the stock price unique to Apple or does it apply to most other equities? Is pessimism about Apple a symptom of pessimism in general? I will suggest a way to answer this in a future article.
Disclosure: Author long AAPL