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As Apple Tests $500 Again, Are Shares Really Cheap?

This article is more than 10 years old.

If you loved Apple’s stock above $700 in September, and you believe the fundamental case hasn’t changed, you should love it even more now, closer to $500. But while bulls – and Wall Street analysts – can point to a cheap earnings multiple to argue the stock is inexpensive at current levels, there are other ways to view the company that tell a different story.

On a forward price-to-earnings ratio -- stock price divided by expected earnings per share for the next fiscal year – Apple shares are trading at just 10.2 times expected fiscal 2013 earnings. By way of comparison, that is less than the half multiple enjoyed by the likes of the Washington Post Company (31.7), US Steel (30.9) and Bank of America (25.7), according to data from FactSet.

However, on a trailing basis that takes into account the last ten years of earnings – known as the Shiller P/E -- Apple shares go for a multiple of 45, more than double that of the S&P 500.

AAPL PE 10 data by YCharts

In a November white paper, Cliff Asness, co-founder of $67 billion (assets) AQR Capital Management, argued that the Shiller P/E is “an old friend” for the stock market. In a recent interview, Asness explained that evaluating the figure is a good way to manage expectations for the type of returns the stock market will generate in the years ahead. (See "Asness Says Investors Need To Get Real About Returns.")

At its current level a shade under 22, the S&P 500’s Shiller P/E is hardly cheap, but nor is it wildly expensive (the figure peaked above 44 in 1999, in the midst of the frothy dotcom bubble).

While Apple’s Shiller P/E looks rich at more than double the broader market, there are plenty of reasons to think that its growth potential is not captured by the figure. The ratio stretches over a long enough period that the iPhone and iPad were barely twinkles in Steve Jobs’ eye, not the revenue and profit engines they have become.

However, the 10-year look also takes into account the possibility that the explosive growth Apple has enjoyed since the iPhone’s 2007 debut could settle into a more mature phase if the company’s innovation dulls in the post-Jobs era.

Many watchers expect an Apple television set sometime in the next few years. Marc Andreessen said at last week’s DealBook conference that he thinks one is possible in 2013, likely in 2014 and definite by 2015. He also pointed out how three products – the iPod, iPhone and iPad – turned a company that was 90 days from bankruptcy in 1997 into the most valuable business in the world.

The future of Apple post-Jobs “is a product question,” Andreessen said. If the company delivers “anywhere near the same level of success, the stock is extremely cheap,” even with increasing competition from the likes of Google and Microsoft, and the potential comeback of former smartphone leaders like Research In Motion, which is set to debut its BlackBerry 10 operating system January 30.

Plenty of analysts still think Apple has more aces up its sleeves, but the sliding stock price has fostered some doubts. Citigroup analysts cut their rating on the stock to neutral Sunday, with a $575 target, after concerns cropped up about iPhone 5 demand. A month ago, UBS warned that while it remains bullish on the stock, multiple expansion will be difficult to come by and won’t provide support. Then last week, the firm trimmed its estimates and price target on the company.

Shares of Apple slipped 0.5% Monday morning to $507.42, after dropping below the $500 threshold in pre-market trading. The stock is 28% below its September peak of $705.07.

AAPL data by YCharts

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