The historically low P/E ratio of Apple (NASDAQ:AAPL) has manifest itself at an unusual time. In the most recent quarterly earnings report Steve Jobs issued the following statement: “With quarterly revenue growth of 83% and profit growth of 95%, we’re firing on all cylinders.”
As a company, Apple has never been better. As a stock, AAPL has never been worse. If you use Jim Cramer’s rule of thumb that suggests an investor should be willing to pay 2x a company’s growth rate, Apple should be trading at a P/E well over 100. How long has it been since you heard someone say Apple should be trading at a 100 P/E? The very thought borderlines on the ridiculous. Steve Jobs and the Apple executive team have been flawless in running this company but they deserve an F when it comes to unlocking shareholder value. Netlix (NASDAQ:NFLX) trades at an 80 P/E, Amazon (NASDAQ:AMZN) at an 83, Baidu (NASDAQ:BIDU) at a 75, and Apple at a 16. Using more accurate metrics Apple trades at a one year forward P/E of 9 excluding cash, and a two year forward P/E of 3 excluding cash. Why can’t this stock keep up with the company growth rate? The answer lies in the heart of the stock action, rather than the company action. In order to improve the stock action, Apple needs to grasp the following four points:
1.) Sophisticated investors believe that stock splits are a waste of time. To these intellectuals, discussing a stock split is basically an admission of one’s stupidity. After all, it does nothing to the P/E ratio or the market cap so why even talk about it? My response to such reasoning is that Wall Street is more concerned with perception than one might suppose. There is a reason why stock splits have been in existence as long as stocks have traded on the exchange. The prevailing perception among average investors is that Apple at $350 is expensive. I’m not kidding, the initial reaction of all clients when they first discover Apple’s current stock price is to remark how expensive it is. If Apple wants to change this false perception of its valuation, do a 10:1 stock split that would reset the current price to $35 a share and see what happens. Timeless Wall Street wisdom suggests the reason for a stock split occurs when a stock has needlessly stalled. If clients discover they can own AAPL at $35 a share with a forward P/E of 9 and a 95% growth rate they will definitely be more excited than they are right now.
2.) For the past five years Apple and Google (NASDAQ:GOOG) have been tied at the hip as the two undisputed leaders of the stock market. At times, this relationship has benefited the stocks but more often than not it has inhibited Apple’s performance. It was Google that popularized the fad of letting your stock run without a split and Apple jumped on the bandwagon. It worked until it didn’t. Google and it’s cool $600 stock price is in the midst of an 18 month stall. Apple and it’s cool $350 stock price is in the midst of a seven month stall. The appetite for pushing a stock to $1000 a share does not exist in this market environment. It’s time for Apple to permanently separate itself from the Google relationship.
3.) As Google and Apple have stalled, Baidu has thrived. Since doing its own 10:1 stock split on May 12, 2010, the stock has doubled. Investors felt so much better about buying Baidu at $70 instead of $700. Whenever you start talking about stock splits the discussion turns to sentiment which is a turn-off to some, but it's hard to argue with Baidu's recent results. Does anyone think that Baidu could have risen to $1,400 a share as quickly as it has run to $140? Does Apple stand a better chance of doubling from $35 to $70 or would it be better off staying the course from $350 to $700? If you want to see Apple at its deserved 100 P/E do you think it could run from $35 to $218 or would it be better for Apple to try and run from $350 to $2,187?
4.) All companies have a window of opportunity in which they are responsible to seize the moment. As the tech sector progresses into the cloud computing era via mobile Internet devices, Apple finds itself in the sweet spot of a once in a generation opportunity. iPhone unit sales surged 113% last quarter. The iPad is crushing any sign of competition and appears well on its way to capturing iPod-esque market share penetration in the new frontier of tablets. The App Store has redefined mobile computing. If management feels that its stock is underperforming because of non-fundamental variables, such as hedge fund manipulation, than perhaps it is time to do something about it.
Apple performed a 2:1 split in June 2000 and another 2:1 split in February 2005. On Wall Street perception is reality and Apple management needs to do something to alter the status quo. It is unlikely that Steve Jobs would approve a dividend or stock buyback because it would mean having to drain his cash cushion, but a stock split? Why not? Nobody is happy with the underperformance of this stock relative to earnings growth. I have to imagine that this is a hot topic of discussion at Apple headquarters considering the large number of shares owned by insiders. The time has come to wake this stock up. If you’re an Apple shareholder and you agree that Apple performance would be better after a 10:1 split to $35 a share, go ahead and let the Apple investor relations team know by clicking here. Management will listen.
Disclosure: I am long AAPL.