Let's talk about that other technology stock, shall we? Youremember. Apple. Apple has a problem. The opposite of Facebook's problem.It's undervalued and likely to stay that way. That'spretty surprising given that, even after the death of its visionaryleader Steve Jobs, Apple has continued on a path of unparalleledprofitability. |
In the second quarter, earnings surged 94% to arecord $11.6 billion — more than three times the annualrevenues of Facebook last year and 11.6 times Facebook'searnings. Yet the stock price simply does not reflect that success. Yes,Apple shares are up 40% this year, even after losing some groundsince April. And it is the biggest stock by market capitalization— more than $530 billion. But by at least one measureApple looks to be significantly under-appreciated by the stockmarket.
Its price-to-earnings ratio for 2012 is just under 14,which means its stock price is 14 times greater than its earningsper share. For comparison, consider that the average P/E for allthe stocks on the S&P 500 — the stinkers as well as thestars – is 16. Facebook's P/E is about 100,depending on how much it earns this year. Amazon's is about176.
( MORE: How Apples Steve Jobs and Book Publishers Cost Consumers Millions ) So why is the anything-but-average Apple trading at aless-then-average price? The death of its visionary leader is, of course, one factor."Obviously the problem with Apple is there is no more SteveJobs," says Todd Sullivan, general partner at RandStrategic Partners and author of the ValuePlays blog. Until his death, Steve Jobs was the face of Apple andinvestors pretty much were investing in his vision. Applewon't trade at a premium to the overall market until Applereleases a product that doesn't have Jobs's thumbprints on it — and that's at least a year away, saysSullivan. Not surprisingly, however, some investors think the market isoverly concerned about the Jobs factor. David Einhorn —whose Greenlight Capital, one of the most-watched hedge funds onthe planet, owned 1.46 million shares of Apple as of lastquarter – predicts that Apple will become atrillion-dollar company and hit twice its current valuation.(Einhorn, by the way, famously shorted Lehman Brothers in therun-up to the financial crisis — a move that wasn'tobvious at the time.) At a conference earlier this month, Einhornargued that most people incorrectly think of Apple as a hardware company.
Instead, hesays, offerings like the iTunes and apps stores mean that Appleis more like a software company, and one that offers a uniquelysticky ecosystem into which customers get drawn and stay forever.It's too much trouble to switch, says Einhorn, and that meansthat Apple is "worthy of a higher multiple." ( MORE: How Many iPads Can Apple Sell? ) Other pros beg to differ. The respected mutual fund manager JeffreyGundlach says the company is basically a hardware company – so he worries about customer saturation. I justwonder how many people will queue up around the block for an iPad87, the Wall Street Journal recently quoted him saying. There are also some technical reasons to doubt that Apple'svaluation will double.
Rand's Todd Sullivan says when astock price reaches a certain absolute level — Applecurrently trades around $560 — investors hesitate to push itup much higher. In his view, Apple is unlikely ever to trade higherthan a P/E ratio of 20. So why does Amazon, now trading around $213, get so much morerespect than Apple, at least when it comes to market multiples? Theanswer, in a word, is risk. "Amazon has probably billionsof customers worldwide. Apple doesn t.
Amazon doesn t have thesame cost of selling its products, and Amazon doesn t rely on thenext product. Amazon relies on people needing things at the lowestcost," says Sullivan. "If Amazon misprices Charmintoilet paper, they aren t going out of business. If Applemesses up the pricing of iPhone 6, that would be huge." ( MORE: Six Ways to Reinvent the Post Office ) Nancy Miller is the author of The Facebook IPO Primer.
You can follow her on Twitter @nancefinance .
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