Apple still trades like a steel mill on its way out of business

Wall Street is starting to ask why.

With the worst of fiscal 2016 behind it and shares hitting record highs, the analysts who cover Apple have started to talk about the elephant in the trading room—namely, the fact that the stock they’ve been selling is priced, in Mark Andreessen‘s words, “like a steel mill on its way out of business.”

  • BMO analyst Tim Long: Said “We continue to be confused by the valuation on AAPL shares… In every year over the past decade except 2008, the largest company has traded at a discount to the market.”
  • Cowan’s Timothy Arcuri: Called Apple a “powder keg” set to explode, noting that the stock was trading “a touch below its normal discount vs S&P 500.”

What, exactly, is a “normal” discount?

That’s hard to say. BMO’s Long took a stab at an answer, comparing the relative valuations of the four largest-cap stocks—GE, Microsoft, Exxon Mobil and Apple—over the past 20 years. The discount, it turns out, is a relatively recent phenomenon, unique to Exxon and Apple:

Click to enlarge. 

Microsoft, at its height, carried Amazon-size premiums, trading 140% above the average S&P 500 P/E ratio. Apple, at its low point last summer, was trading 53% below the S&P 500. See chart:

Click to enlarge. Not seeing the charts? Try the website. 

More than a dozen analyst have raised their price targets in the past month on the strength of the next generation of iPhones. I’m waiting to see if they also raise their multiples.

6 Comments

  1. Gregg Thurman said:
    There are so many reason WS values, not just Apple nut most of the tech industry, incorrectly that its hard to single out just one. If forced to pick one I’d say it was their formal education (MBA’s) and the lessons passed down by superiors (a misnomer if ever there was one).

    They have been trained to value brick and mortars, where revenue net income and how efficiently everything in between is managed. They haven’t a clue how to value technology innovation as they have inbred inability to see beyond current use cases. They are suspect of new technologies that might be supplanted by next year’s startup.

    They (WS) ignores net income in favor of revenue and unit market share growth. They would never value retail or durable goods manufacturing the same way they do tech. WS doesn’t have valuation metrics for long term innovation, profit domination with small market share.

    Couple all this with the proliferation of fake news and WS leadership is blind as to who the real leaders in tech are.

    How else do you explain the the seventeen most recent price targets having a range of $117 tp $185. You won’t find a comparable price target range in any other non-tech sector. Ask yo0urself this: Did WS foresee the strength and duration AAPL’s post January rally? Evidence that WS did would be in the timing of their price targets a AAPL’s trading volume. The answer id that WS did not. WS relies almost entirely on Apple’s guidance, and then they largely misinterpret it. You can see the disconnect in their “research” notes and what management says in the Company’s 10Qs.

    6
    February 25, 2017
    • Fred Stein said:
      Like the way you think,and your ironic writing, Gregg. Adding:
      Not just “superiors’ but peers and, in the case of institutions, the news and retail customers influence. Call it group think,, peer pressure, herd instinct. When the stock is down, and when certain fundamentals are temporarily weak, funds and retail investors cannot resist the emotional tug to ‘follow’, even to excess, i.e.. discounting before 40%. Humans are pack hunting animals, rational thought is only one component of decision making.
      There’s another factor, sound bites. We’ve heard them all, Jobs is dead, LOLN, commoditization of HW, market saturation, and many more. These sound bites are “fake” knowledge, or fake insight.. They adhere to Steven Colbert’s truthiness, and especially when reported on TV.. It is sad that people are so gullible.

      0
      February 26, 2017
  2. Robert Paul Leitao said:
    Apple trades primarily as the maker of the iPhone and the share price dynamic is tied to expectations for iPhone unit sales. The recent recovery in the share price is due in large part to expectations of a so-called “iPhone super cycle” commencing this fall.

    Referencing the “deep discount” graph, in calendar year 2010, Apple traded higher relative to the market based in part on expectations for the iPad which debuted early in that year and the strong performance of the original iPhone 4 handsets which were released in June of that year. In late CY2012 and CY2013, the iPhone line was coming off an extraordinary iPhone 4 series handset cycle and unit sales moderated following the release of the iPhone 5 series of handsets. There was some recovery in the discount to the market as the Street anticipated the iPhone 6 series handsets that debuted in the fall of 2014 only to see the discount to the market grow larger again as the second of the iPhone 6 series models were released in the fall of 2015 and unit sales moderated again.

    The recent recovery in the share price relative to the market occurred due in large part to unit sales expectations for the upcoming new iPhone and in response to the surprise performance of the iPhone 7 handsets which make use of the original iPhone 6 form for a 3rd consecutive model year. Apple’s December quarter results were above Street consensus and March quarter guidance in the context of December quarter results were a positive for the share price.

    Due to the discount on Apple’s multiple to the market, management has been able to reduce the fully diluted share count by about 20% in just over four years through a massive share repurchase program and long-term investors have been able to acquire shares at a similar discount.

    For long-term investors the discount to the market’s multiple has provided for the opportunity to acquire positions in Apple at attractive share prices and for the long-term Apple’s ability to have repurchased about 20% of the fully diluted share count with $31 billion remaining in the current $175 billion repurchase plan will benefit the share price moving forward.

    The past has been good news for long-term investors. The question is: How long will this discount to the market’s multiple continue?

    5
    February 25, 2017
    • David Emery said:
      Let’s see what happens as a result of Warren Buffett’s big investment…. Could that be the event that forces re-valuation?

      0
      February 27, 2017

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