Though a long-time market darling, the reality is Apple's (AAPL) stock remains one of the cheapest of the major tech names on a relative basis. Despite exactly one earnings miss in 7 years Apple now trades at 13x earnings; less than half its multiple of 32x two years ago. "It makes no sense to me, frankly," says Reuters Blogger Felix Salmon.
Perhaps most baffling to Salmon is Apple's valuation relative to other tech stalwarts. "There are four big companies on the Internet: Amazon (AMZN), Google (GOOG), Microsoft (MSFT), and Apple," he says. "Maybe Facebook when it goes public next year." And he points to Amazon which is trading at 90x earnings and questions "Why would you pay 90x earnings for Amazon when you can pay 13x for Apple?"
Salmon has answers and causes, both real and imagined for Apple's relative discount.
(1) The Law of Large Numbers: When a company has a market cap of some $350 billion dollars it simply becomes impossible to move the needle in terms of paying up. Everyone who wants Apple has managed to buy it over the last decade. The bears have been devastated. Once both sides of a trade have made up their mind about a company it's hard to get the market to change its mind.
(2) Slowing Growth: Typically a discount valuation means investors are expecting slower growth. Salmon says Apple's pipeline is robust enough to make such worries illusory. The vast majority of the world has neither a smartphone nor a Mac. This leads Salmon to believes there's "as much growth potential or more growth potential for Apple than there's ever been."
(3) Leadership: Tim Cook is by all accounts tremendously gifted from an operational side. But where Apple really excels is in product design. It's going to take years for Apple to prove that their gift for knowing what customers want before they even know they want it is legendary. The late Steve Jobs will get credit for new Apple products for years to come, making it impossible to restore faith in the Apple development machine. Salmon says Cook "still has Johnny Ives, he still has all of Apple's great design, he still has exactly the same pipeline. He still should be given some kind of benefit of the doubt."
Television and the cloud have been relative failures for Apple so far. While rumors are rampant that Apple, Google and virtually everyone else is coming out with revamp sets for next year, there are no hints at exactly what those products are going to look like. They better be good if Apple hopes to assuage the fears limiting multiple expansion.
Despite the strength of Apple's stock over the last decade it would trade near $900 if it still had a P/E of 32x. There's something going on there.
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