Apple (AAPL) is always a great company to analyze; there are so many angles to choose from. Everyone likes valuation, so I'll look at that side of the argument here. If I go to the competitors page on Yahoo Finance for Apple, I get the following three competitors: Google (GOOG), Hewlett Packard (HPQ), and Research in Motion (RIMM). Seems fair. But I don't want to make the valuation argument against just those three. So I'll add a few more names: Microsoft (MSFT), Dell (DELL), and Amazon (AMZN).
Now you may disagree with a choice here or there; that's fine. In one way or another, each of those companies competes with Apple. So instead of debating the choices, let's look at some valuation metrics. We'll first look at company size for an industry overview, but the main focus will be on the five valuation metrics.
|Market Cap||Price||Market Cap. (B)|
|Research in Motion||$18.05||$9.40|
Obviously, Apple is the largest of these firms. Collectively, these seven companies have a market cap of $967 billion, and they lost $30 billion on Wednesday. Apple accounts for about 38% of the group's total value. Without Apple, the total is $600 billion. That means Apple's market cap is 61% of the other six combined -- Apple is the size of Microsoft, Amazon, and HP combined.
But let's get down to the real business. I'm going to compare Apple to its competitors in terms of price to sales, price to book, P/E (trailing 12 months), P/E (forward 12 months), and PEG ratio (price to expected earnings growth over next 5 years). I will use two totals. One is a simple average (called "mean" from here on out), and a weighted average by market cap (called "average" from here out).
We'll first look at price to sales:
|Research in Motion||0.49||$55.50|
Apple's price to sales ratio comes in at 3.49, which is higher than five of the six competitors. Google's high number brings the weighted average up to almost where Apple trades today, but the simple average is much lower. If you take out Google, the mean is just $155. You'll notice that the three primarily hardware companies have very low price to sales ratios, which brings down the simple average. It's a good thing Apple doesn't trade at those valuations.
We'll hit price to book next:
|Research in Motion||0.99||$79.38|
This will make investors feel a little bit more comfortable after seeing that last table. Apple's price to book is 4.93, which again is higher than five of the six. This time, it's Amazon that is the highest. We will see Amazon's valuation metrics are skyrocket high from here on, and I'll discuss that impact later. The scary part to think about here is what does Apple do going forward? If Apple eventually starts buying back shares and retiring them, the price to book ratio will go even higher as their asset base will decrease. Remember, they have over $80 billion in cash, plus short- and long-term investments currently. What they do with those going forward will have a huge impact on this ratio.
The trailing twelve months P/E ratio will be the next area of focus:
|PE (Trailing)||Value||Apple Price|
|Research in Motion||3.29||$91.07|
Apple's trailing P/E is 14.28, which seems rather fair if you take out those of HP, Dell, and RIMM. We won't see Apple's P/E at Amazon's level again, but it's a possibility to see it at that Google level of 20 in the future. My guess though is that as time goes on, we head closer to that of Microsoft. The Apple/Microsoft P/E spread should compress a bit over the next year. The only way I see the trailing P/E getting close to 5 is if Apple is trillion-dollar company with $200 billion in earnings. And since Apple's earnings in the past 12 months were only $26 billion, I don't see that happening anytime soon.
We'll look at forward P/E ratios next:
|PE (Forward)||Value||Apple Price|
|Research in Motion||3.82||$147.31|
Again, Amazon throws off the numbers here, as the simple average without Amazon is a mere $302. Apple's forward P/E is 10.25. When I wrote about Apple's compelling valuation on October 3, the forward P/E was 11.47, and just this summer it was over 12. This ratio has compressed lately, and even as Apple's earnings estimates have gone up recently, the stock has not followed. One might think that these numbers will catch up soon. If you give Apple a forward P/E of 12 based on current EPS estimates, the stock would be worth $463. That's about 17% higher than current levels. I feel that a forward P/E of 11 is justified currently, so I feel Apple right now should be valued at about $425. The street does not agree at the moment.
Finally, we'll take a look at the PEG ratio:
|PEG (5-Year)||Value||Apple Price|
|Research in Motion||0.38||$250.34|
Apple shareholders would really love if Apple was at $4,862 right now, wouldn't they? Sure, they'd even love it above $1,200, but it isn't. The simple average here is $515 (excluding Amazon), so Apple's PEG ratio of 0.60 is a bit undervalued. That means Apple shareholders are paying less for future growth than their competitors' shareholders are. I think Apple will reach that $515 level at some point (may be split-adjusted), but that's a while out. Assuming the same number of outstanding shares, that would put Apple's market cap at $478 billion. Does anyone see a company that large in the near future? I don't. Maybe 18-24 months out, but not in the near future.
Thanks to the lofty valuations of Amazon, if Apple was valued like its competitors, it would be trading at over $700 a share right now. But since we know that Amazon trades at some ridiculous valuations, I've made the distinction above of the ex-Amazon numbers. If you use the weighted average number, you'll see that Apple's current price of $398.30 seems rather comparable to its competitors.
Again, this is just a simple valuation exercise. You may favor one metric over another. I certainly do, as I tend to favor P/E numbers over the sales/book metrics, but others might like those. You might also choose to use different competitors. That's fine too, but I like these six, and they certainly will compete against Apple in the future (although you could make the case that RIMM will be gone soon).
Using the weighted average method seems most appropriate because of Apple's size. You wouldn't normally compare Apple to a company with a $10 billion or less market cap, would you? Thus, Apple seems valued fairly to its competitors right now. I mentioned before that I think Apple should be trading at $425, but that's just my opinion. For those of you wondering what my opinion of Apple is, it's a buy at these levels. I would suggest buying on pullbacks if possible. I used to recommend $375 as a good entry point, but for now, I think $400 is the new pullback entry point. My target for Apple is $480, based on a 12 multiple and $40 of fiscal 2012 earnings (ending in September). Thus, I feel that Apple could rise about 21% in the next eleven months.