While Apple's (AAPL) revenue and earnings have absolutely skyrocketed over the past few quarters -- it reported 92% growth in its recently ended fiscal Q2 alone --its stock price has barely advanced since reaching $320 in late October. Yesterday, the stock closed at $346.57, or 8.6% higher than where it was trading at over 7 months ago.
The NASDAQ-100 (QQQ), by contrast, has rallied 18.22% over the same time period. The stock hasn't even been able to outperform the NASDAQ-100 despite trading at the cheapest relative valuation of the group and posting almost the highest net income growth rate surpassed by only a handful of stocks with lofty valuations. Even the broader S&P 500 (SPY) has outperformed Apple since October, posting 16.2% gains in the period.
Apple's stock price has simply been unable to keep pace with its explosive 90% growth in earnings. As a result, Apple's P/E ratio has gradually fallen over the past year to the point that the stock is now trading at the lowest valuation we've seen since the depths of the financial crisis -- the stock currently trades at a mere 16.5 trailing P/E ratio. In fact, between April and June of 2009 -- just after the market bottomed -- Apple was trading at a higher trailing P/E ratio (16.93) than it does today.
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Only during the aftermath of Lehman Brothers did we see Apple trade at a lower valuation -- and even then Apple's P/E ratio was only slightly lower than it is right now. Yet, despite posting EPS growth of 92.2%, 75.2%, 67.5%, 74.6% and 86.0% over the past five quarters, the stock can only manage to trade at depression era valuation? Isn't there something wrong here?
Quarter after quarter over the past 5 years the stock repeatedly posts over 50% EPS growth, yet Apple cannot seem to get any love from Wall Street. For the past five years, analysts have been expecting Apple to grow at a pace of only 20% -- despite Apple's average 50% growth rate -- and for the next five years, we're hearing the same old nonsense all over again.
Is it no wonder the average American investor no longer has any trust in equities? Who wants to invest in a system that doesn't reward investors when they're right about a company's fundamentals, earnings and valuation? Despite what one might hear in the press, a case can be made that Apple is one of the most hated stocks on the S&P 500 and here's why:
Before you're quick to point out -- as many inept fund managers and misled members of the press often do -- that Apple is Wall Street's darling simply because the stock is up over 300% since the lows of the financial crisis, consider the following. Apple reported $6.78 in EPS on $37.5 billion in revenue in fiscal 2008 (the year of the financial crisis). The company ended the year with $24.5 billion in cash, or $27.07 in cash per share.
Apple is not even close to the same company it was in 2008. In fact, the rise in the stock price only merely reflects the actual rise in Apple's cash and net income without any added premium. It isn't trading on some future highly speculative valuation.
Just to get an idea of how much larger of a company Apple is since 2008, the company just reported $6.40 in EPS in its seasonally weakest quarter of the year -- almost more than it reported in all of 2008 combined.
Apple's cash has grown to $65 billion -- almost triple the amount of cash it had at the end of 2008. For the 2011 fiscal year, Apple will likely report about $27.30 in EPS on $111.7 billion in revenue -- that is nearly a four fold increase over the $6.70 in EPS Apple reported in 2008. So the 300% rise in Apple's stock price is merely a reflection of the 350% rise in earnings, the 300% rise in cash and the 300% rise in revenue.
If Apple was trading at the same level as it was during the financial crisis, it would be trading at a 2.5 trailing P/E ratio and less than 1 times its expected 2011 total cash. So obviously the stock is going to rally 300% because the size of the entire company grew 300%. But first of all, the stock hasn't even risen 75% from where it was trading in December 2007, despite growing its earnings by over 700% in the period.
Most of the rally investors have seen since the lows of the financial crisis is a restoration of value. Apple had no business trading in the $80-$100 a share range. In fact, during the pinnacle of the financial crisis, Apple had its strongest single quarter over the past 6 years. It grew its earnings by 155.67% between October 2008 and December 2008. That three month period was the most prolific in the company's recent history. Yet, the stock lost nearly 70% of its value due to issues that had absolutely nothing to do with the company or the company's performance.
Today, we're seeing the exact same thing on an on-going basis. Instead of focusing on Apple's 92% earnings growth, the very same day Apple released its results, the New York Times published an article about Apple's iPhone tracking issue -- which is not only very suspicious timing, but very distracting from what is actually important.
The next day, CNBC ran stories all day about how iPhone tracking invades privacy instead of focusing on Apple's astonishing 92% earnings growth rate. What is more important to Apple's valuation? The fact that the company grew 92%, or this iPhone tracking issue, which will be old news next month?
In June 2010, instead of focusing on the success of the iPhone 4, analysts, fund managers, CNBC and the general press blew Antennagate completely out of proportion -- Google search yields 411,000 Antennagate results. CNN called Apple's "Antennagate" the biggest tech failure of 2010.
I'm willing to bet that not many reading this article are aware that Apple has sold more iPhone 4's than every other type of iPhone combined. Apple sold 7.4 million iPhone 3GS's in its debut quarter versus the 14.1 million -- almost double -- iPhone 4's sold in its debut quarter. But most probably know about Antennagate.
This same type of story -- different elements -- has played like Groundhog's Day over and over again and in a few weeks, the financial press and Wall Street will find some other financially irrelevant news story to further distract the financial public of Apple's highly depressed valuation.
Apple is almost certain to end the year with $81 billion, or $85.90 in cash per share. Interestingly enough, Apple traded between $80 and $95 a share for almost 5 months during the financial crisis and traded sub-$85 in March 2009 -- only 2 years ago. The company has almost that much in cash per share today and will have that much in cash per share when it reports earnings this October.
So to argue that because Apple's stock is no longer trading near its cash value, trades only at a slightly higher P/E ratio than it did at a time when the entire financial system had basically collapsed, and because the stock barely keeps up with the growth of the underlying company and trades at an infinitesimal fraction of its actual growth rate that it's somehow Wall Street's darling? What's next? A janitor living in Manhattan is called rich because he receives a 5% pay raise, increasing his salary to $20,000 a year?
What this should illustrate is that a percentage gain in a stock's price isn't a good barometer to judge valuation or to call a stock a darling of Wall Street -- actually it's entirely irrelevant but financial reporters, fund managers, news anchors and investors apparently lack the intellectual capability to understand why it's irrelevant so I have to sit here and waste my time explaining this most basic topic which should be considered as part of a baseline requisite knowledge necessary to work in the financial industry (but alas it isn't).
What it should always come down to is valuation. Not percentage gains. If Apple was trading at a 40 P/E ratio based on its average 60-90% growth rate, 30% realistic 5-year future growth rate expectation and based off its expected $40 billion per year in future cash flow, of course it would be easier to make a case that it's a favorite of Wall Street.
Yet, when we see Google (GOOG) report 17% earnings growth and trade a 20 P/E ratio and then watch Apple report 92% earnings growth and trade at a 16 P/E ratio, how in the hell can anyone say that Apple is treated as a darling? Amazon (AMZN) missed earnings expectation for the third time in five quarters, and grew at a far lower growth rate than Apple on both the top and bottom line and trades at a 90 P/E ratio. Netflix (NFLX) also missed expectations, grew at a far lower growth rate than Apple on both the top and bottom line and trades at a 70.58 P/E ratio.
For whatever reason, there seems to be this major imbalance in large cap tech where the worst performing stocks get the best valuations and the best performing stocks get completely sh** on. On an objective basis, Apple is very undervalued, and can hardly be called the darling of Wall Street. Amazon misses its expectations and the stock rises 10%. Wall Street would have an absolutely sh**-fit if Apple missed on the top or bottom line. The stock would get absolutely crushed. You would see the stock trade at 8 times its cash and 12 times earnings if the stock actually missed. I'll get to Apple's relative valuation over the next few weeks.
Disclosure: I am long AAPL.