The only explanation for the ridiculously low price to earnings ratio of Apple Inc. (NASDAQ:AAPL) is that analysts are living in some sort of fairly tale. Perhaps they have all taken a bite of Snow White’s apple and there are not any princes who wish to kiss them.
Compare Apple with Microsoft
Apple Inc. (NASDAQ:AAPL) is a company that manufactures much loved products and has an enviable history of coming up with innovative new products. Microsoft Corporation (NASDAQ:MSFT) is a company whose products are mostly tolerated by their users and the company has a long history of developing products that are total flops.
Apple makes products that people want to buy. People want to find alternatives to most Microsoft products.
So why does Microsoft trade at a price to earnings ratio of 15.83 and Apple Inc. (NASDAQ:AAPL) only trade at a P/E ratio of only 9.56?
Consider that Microsoft is expected to see 5 year earnings growth of 9.03% per year. While, Apple’s earnings are expected to grow at rate of 18.98% per year over the same period of time.
How does a company with an expected annual earnings growth of 18.98% rate a P/E ratio of only 9.56? Shouldn’t Apple have at least the same P/E ratio as Microsoft? That would price Apple’s shares at well above its all-time high of $702. So why is Apple Inc. (NASDAQ:AAPL) stock receiving so little love?
The media is to blame
Apple’s biggest problem is that it grew to be the champion of its industry and news stories about a champion’s demise sell more advertising. Fear always attracts more attention than positive news.
Media reports general state that Apple’s share price is near 52 week lows and is down 40% from its all-time high. The media seldom mentions that Apple’s stock was near $90 at the market’s bottom in 2009. That gives Apple a 4 year gain of 370%. Looking back to 2003, Apple Inc. (NASDAQ:AAPL) traded at $6.60. Providing investors with a ten year price gain of 6,300%. This represents a significantly different news angle.
Now nobody expects Apple to repeat that amazing performance. However, an 18.98% annual earnings growth should reasonably be expected to lead to a matching growth of the share price if this fairy tale told more truth.
Teen survey tells the truth
The most telling statistic regarding Apple Inc. (NASDAQ:AAPL) comes from a study recently issued by Piper Jaffry. The study was a survey of 4,800 teens. 1,600 of the teens were from affluent households and 3,200 came from average income households.
Of these teens, 48% already own an iPhone and 62% plan on making an iPhone their next smartphone purchase. Additionally, 51% of the teens own tablets with 68% of those tablets being iPads. Of the 17% of teens who plan to buy a tablet in the next 6 months, 68% plan to buy an iPad.
So forget all those advertising campaigns from Samsung and Google that denigrate the iPhone. Forget all the media headlines about the latest iPhone killer. iOS devices are still the hottest technology.