The stock market does not understand Apple

Back to the balance sheet
[Via asymco]

I first noted a correlation between Apple’s share price and its balance sheet a year ago. In February, when I last checked, Apple’s share price was priced nearly at 4.6 times its cash value. The stock has had a brief rally but has returned to the trend line it’s had since late 2008.

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Warren Buffett this weekend explained that Wall Street just doe not understand Apple or other 21st century companies.

  • “I would not be at all surprised to see them be worth a lot more money 10 years from now but I would not buy either one of them.”
  • “I sure as hell wouldn’t short them either.”
  • “We couldn’t predict what would happen to Apple 10 years ago and we can’t predict what will happen to it 10 years from now.”
  • “The chances of being way wrong in IBM (IBM) are probably less, at least for us, than the chances of being way wrong in Google or Apple.”
  • “I just don’t know how to value them.”

The inability of the stock market to fairly value Apple on any fundamental sense is an easy proof of the inefficiency of the market. It is not perfect, especially with disruptive companies such as Apple.

The figure above shows the price of Apple correlates with the amount of  cash it has on hand. The important aspect of this is that there is no fundamental reason for why this should be. None. An efficient stock market should not value a company based on this measure.

Then we have this, from the same article. It looks at fundamentals and shows just how far off from expected they are for Apple:

 

The P/E ratio is supposed to be a measure of the future value of the company. Amazon has a P/E ratio of about 190. The market expects its stock price to increase a lot. Apple’s P/E ratio is about the same as a utility. The stock market does not expect Apple’s earnings in the future to grow much.

The PEG ratio is a somewhat crude measure of how efficient the market values a company. The P/E ratio should be a measure of growth. If we divide that by growth, we get the PEG ratio. A value of 1 indicates a close approximation of future growth with real growth.

Apple over the last 5 years has never been close to a ratio of 1. The market has substantially undervalued Apple and not properly predicted growth. Apple is almost ridiculously undervalued right now with a PEG ratio less than 0.2