How well is Apple Inc. (NASDAQ:AAPL) actually performing? Asymco’s Horace Dediu recently took a close look at Apple’s finances and used two popular valuation methods to deliver a verdict on the iPhone maker’s overall worth.
First, Dediu calculated Apple’s price-to-earnings ratio (P/E ratio) by using Apple’s earnings per share figures from the last 12 months. According to Dediu, Apple has a P/E ratio of 13.3. In comparison, rival mobile operating system maker Google Inc. (NASDAQ:GOOG) has a P/E ratio of 29; Microsoft Corp. (NASDAQ:MSFT) has a P/E ratio of 13.7, and Korea-based Samsung Electronics (SSNLF.PK) has a P/E ratio of 11. On the other hand, profit-lacking Amazon.com Inc. (NASDAQ:AMZN) has a P/E ratio of 1270.
As noted by Dediu, Apple’s P/E of 13.3 suggests that an investor who bought one share of Apple stock could expect to recoup that initial investment with earnings from the company over a period of 13.3 years. Any earnings after this period would be “profit” for the investor.
However, the analyst pointed out that P/E ratios are actually poor indicators of a company’s true value. Dediu noted, “A company can defer income (as Apple and Microsoft do), it can invest earnings (as Amazon does) and can otherwise avoid declaring it since it’s taxable.” For this reason, Dediu believes that the enterprise value to free cash flow ratio (EV/FCF) is a much more reliable indicator of a company’s overall value.
As Dediu reports, enterprise value “is not a matter of opinion but a fact” — it includes debt in the value calculation and “excludes cash which is a measure of past performance.” Similarly, free cash flow only includes operating cash flow after capital expenditures have been subtracted.
Although both ratios are supposed to give investors an idea of how well a company is performing, Dediu notes that the ratios can be “deceptive” in certain situations. For example, “If a company has minimal cash and declares all free cash flow as earnings then the ratios are the same.” However, Apple’s P/E and EV/FCF ratios differ quite significantly. According to Dediu, Apple has an EV/FCF ratio of 7.54, nearly half of what its P/E ratio is calculated to be.
In other words, the market appears to indicate that Apple actually has “7 more years of current profitability and not 13.” This puts the Cupertino, California-based company even further ahead of its four major tech rivals.
So why is there so much confusion about Apple’s valuation? Dediu noted that investors may be thrown off by Apple’s revenue deferrals. According to the analyst, “We had similar confusion when the company was deferring most of its iPhone revenue.” Here’s how Apple has traded over the past week.
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