Let’s talk about that other technology stock, shall we? You remember. Apple.
Apple has a problem. The opposite of Facebook’s problem. It’s undervalued and likely to stay that way. That’s pretty surprising given that, even after the death of its visionary leader Steve Jobs, Apple has continued on a path of unparalleled profitability. In the second quarter, earnings surged 94% to a record $11.6 billion — more than three times the annual revenues of Facebook last year and 11.6 times Facebook’s earnings.
Yet the stock price simply does not reflect that success. Yes, Apple shares are up 40% this year, even after losing some ground since April. And it is the biggest stock by market capitalization — more than $530 billion. But by at least one measure Apple looks to be significantly under-appreciated by the stock market. Its price-to-earnings ratio for 2012 is just under 14, which means its stock price is 14 times greater than its earnings per share. For comparison, consider that the average P/E for all the stocks on the S&P 500 — the stinkers as well as the stars — is 16. Facebook’s P/E is about 100, depending on how much it earns this year. Amazon’s is about 176.
So why is the anything-but-average Apple trading at a less-then-average price?
The death of its visionary leader is, of course, one factor. “Obviously the problem with Apple is there is no more Steve Jobs,” says Todd Sullivan, general partner at Rand Strategic Partners and author of the ValuePlays blog. Until his death, Steve Jobs was the face of Apple and investors pretty much were investing in his vision. Apple won’t trade at a premium to the overall market until Apple releases a product that doesn’t have Jobs’s thumb prints on it — and that’s at least a year away, says Sullivan.
Not surprisingly, however, some investors think the market is overly concerned about the Jobs factor. David Einhorn — whose Greenlight Capital, one of the most-watched hedge funds on the planet, owned 1.46 million shares of Apple as of last quarter — predicts that Apple will become a trillion-dollar company and hit twice its current valuation. (Einhorn, by the way, famously shorted Lehman Brothers in the run-up to the financial crisis — a move that wasn’t obvious at the time.) At a conference earlier this month, Einhorn argued that most people incorrectly think of Apple as a hardware company. Instead, he says, offerings like the iTunes and apps stores mean that Apple is more like a software company, and one that offers a uniquely sticky ecosystem into which customers get drawn and stay forever. It’s too much trouble to switch, says Einhorn, and that means that Apple is “worthy of a higher multiple.”
(MORE: How Many iPads Can Apple Sell?)
Other pros beg to differ. The respected mutual fund manager Jeffrey Gundlach says the company is basically a hardware company — so he worries about customer saturation. “I just wonder how many people will queue up around the block for an iPad 87,” the Wall Street Journal recently quoted him saying.
There are also some technical reasons to doubt that Apple’s valuation will double. Rand’s Todd Sullivan says when a stock price reaches a certain absolute level — Apple currently trades around $560 — investors hesitate to push it up much higher. In his view, Apple is unlikely ever to trade higher than a P/E ratio of 20.
So why does Amazon, now trading around $213, get so much more respect than Apple, at least when it comes to market multiples? The answer, in a word, is risk. “Amazon has probably billions of customers worldwide. Apple doesn’t. Amazon doesn’t have the same cost of selling its products, and Amazon doesn’t rely on the next product. Amazon relies on people needing things at the lowest cost,” says Sullivan. “If Amazon misprices Charmin toilet paper, they aren’t going out of business. If Apple messes up the pricing of iPhone 6, that would be huge.”