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Cognitive dissonance

9 August 2011 By Robert Cyran

Could Apple be worth $1 trillion? It’s conceivable. The $342 billion iPhone and iPad maker became – if only briefly – the most valuable company in the United States when it surpassed Exxon Mobil on Aug. 9. Yet its sales have been surging 80 percent a year, and profit faster. And Apple trades roughly in line with the growing U.S. market – and at less than half the price-to-earnings multiple it fetched in 2006, when revenue growth was much slower.

Apple now trades at about 11 times estimated earnings for the fiscal year ending September 2012. The S&P 500 index is valued at about 10 times next year’s earnings. But Apple’s sales growth is not far off 10 times faster than that of the average company. The gadget producer also sits on $76 billion of cash and investments.

To get at this dissonance another way, consider Apple’s PEG ratio. This hints at the price of growth by dividing a company’s PE ratio by its projected percentage earnings growth. A smaller figure suggests a company is cheaper. Apple’s is 0.2. That’s low compared to growth darlings. Burrito purveyor Chipotle Mexican Grill, for instance, comes in at 2.1, and Salesforce.com at 13.2. Pandora and LinkedIn aren’t even expected to make money.

Alternatively, put Apple on the same PE multiple it traded on in 2006, and it would be worth almost $900 billion. A premium for today’s faster growth could get it to $1 trillion. Apple can’t be so cheap just because Steve Jobs is in precarious health.

True, Apple already sells more per quarter than it did in all of fiscal 2007, and it takes more and more success to move the needle. Growth could easily slow. Yet the smartphone and tablet markets are young, the company’s customers show remarkable fidelity, and areas such as television are ripe for new gadgets. Moreover, Apple’s return on equity is almost twice what it was in 2006, suggesting it has pricing power.

Maybe investors simply can’t fathom so large a company. A $1 trillion Apple would mean adding all of Microsoft, Google, Intel and Amazon – and more – to the firm’s current market capitalization. Perhaps Apple is correctly priced, the market too expensive, and growth stocks grotesquely so. But something doesn’t add up. In relative terms, Apple should be worth far more.


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