The market is not rational when it comes to Apple

scorecardby terren in Virginia

The Apple Growth Scorecard
[Via asymco]

Apple’s revenue for the first quarter was $24.7 billion, which at 83% was the largest quarterly revenue growth they ever experienced. Operating margin was an all-time high of almost $7.9 billion, representing 31.9% of revenue and yielding 95% EPS growth.

After earnings were announced the share price reached $350.7. This includes $70 in cash. Trailing twelve months’ earnings were $20.97. That makes the Price/Earnings ratio 16.7. Excluding cash, P/E is 13.4. The average growth over the past four quarters was 77%.

The following chart shows the share price vs. earnings. The green line is price and the blue line is share price. I also added multiples of the earnings to show how the stock traded in certain multiple bands.


If this was a baseball game, the official scorer would have been fired a long time ago.

Normally, the price to earnings ratio (P/E) should serve as a reasonable substitute for the growth of a company, as expected by the rationalists on Wall Street. A P/E of 25 means they expect larger growth than a P/E of 12 – roughly twice as much.

So, the greater the earnings the greater the price should be. Except with Apple. As shown in the asymco post, there is no correlation between P/E and earnings growth at all. In fact, as he shows in a great graph, since the recession started, the P/E pretty much is independent of earnings growth.

Earnings grow 10% – P/E of 20. Earnings grow 100% – P/E of 20. Wall Street just does not value Apple’s fundamentals in any sort of rational way.

When it comes to Apple , they appear to simply be irrational. Since 2009, Apple’s sales have been accelerating, with sales growth actually increasing. And its earnings have also accelerated from 11% over the previous year in 2009 to 92% just this last quarter! So the increase in earnings is increasing each quarter.

That is what is normally seen as a growth company and is usually regarded with a higher P/E.

Yet there has been no change in the P/E numbers. Wall Street just cannot understand what a 21st Century Company really looks like.

It is like the team keeps hitting grand slams but the official scorekeeper only gives them singles. So anyone reading the scorecard thinks that things are just barely passable, instead of off the charts.

And in Wall Street’s world, the official scorekeeper not only keeps their job but gets a bonus. Ain’t America great!

One thought on “The market is not rational when it comes to Apple

  1. If you really want to get depressed, read the “analysts” in the comment section of the above article! The only one that strikes me is the last one by “Senator Gronk”. That is funny.
    My theory is that they are all jealous that they didn’t by stock back when it was under 10!!

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