How Badly is Apple Undervalued?

On Tuesday, Apple Inc. (NASDAQ:AAPL) shares reached yet another new all-time high.  Shares climbed as high as $505.23 in morning trading.  Shares of the tech giant continue to be fueled by strong earnings and product innovation.  However, compared to other tech companies, Apple’s P/E ratio is relatively low.

A P/E ratio is a valuation ratio calculated by dividing a company’s share price by its earnings per share.  While the ratio does not provide the whole story of a company, a high P/E usually suggests that investors are expecting higher earnings growth in the future, compared to companies with a lower P/E.  Bespoke Investment Group, a money management and research firm, recently compared Apple’s P/E ratio to other major tech players.

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Bespoke’s findings suggest that Apple shares have significant upside.  The firm explained, “At a current price of $502.50, AAPL trades at 11.8 times this year’s expected earnings.  The S&P 500 (NYSEARCA:SPY) now trades at 13.5 times earnings on a weighted basis, while the average P/E ratio of the 500 stocks in the index on an unweighted basis is 17.7 times earnings.  Given the fact that AAPL has one of the highest individual growth rates of any stock in the S&P 500, it isn’t too much of a stretch to assume that the stock should have a ‘market’ multiple.  To get there, though, AAPL would need to rally to just under $574 per share, while an average P/E ratio would send the stock to $752 per share.”

Although some may claim that Apple’s stock is overvalued at $500 per share, looking at the P/E ratios of individual companies tell a different story.  If Apple traded at the P/E of IBM (NYSE:IBM), Google (NASDAQ:GOOG) or Qualcomm (NASDAQ:QCOM), shares would trade at $548, $615 or $700, respectively.  Furthermore, if the P/E from Yahoo (NASDAQ:YHOO), Amazon (NASDAQ:AMZN), Salesforce.com (NYSE:CRM) or Netflix (NASDAQ:NFLX) is applied to Apple, shares would trade between a range of $803 to $17,947.  Bespoke explains, “Obviously, AAPL is not likely to trade at a multiple similar to the ones that NFLX, CRM, or AMZN currently have.  In the case of NFLX, not even the Fed can print enough money to cover a price that high.  From the law of large numbers, competition, and questions over the sustainability of its recent track record of torrid growth, there are legitimate factors keeping AAPL’s multiple where it is.”

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While Apple is not likely to trade near $17,000, simply saying shares are overvalued because it crossed the $500 mark does hold credibility.  Currently, analysts have Apple price targets ranging from $270 to $700, with a median target of $600.  Apple is expected to unveil a new iPad version in the coming weeks that could boost shares further.  According to the WSJ, Verizon (NYSE:VZ) and AT&T (NYSE:T) are expected to sell a new version that runs on the latest fourth-generation wireless networks.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com