Apple’s outstanding financial results reported on April 20, 2011 simply confirmed what most of us already know: Apple has become the center of gravity in the tech world. Every technology player wants to emulate or align with Apple. Apple products rock. The Apple retail and end-user experiences make your bones melt (that’s a frequently-used metaphor in romance novels!). Revenues for the quarter were $26.7 billion, up 83%. Profits were $6 billion, nearly double! And this in a post-holiday, post-consumer binge digestion quarter. Undervalued Stock? But Apple’s stock price did not rise appreciably. Why is Apple’s stock so undervalued? I believe that concerns over Steve Job’s mortality is baked into the discounted P/E ratio. Horace Dediu @Asymco is the best analyst in the mobile/high tech world, bar none. His analysis is published free to all. And, unlike most self-absorbed pundits, he’s ruthless in evaluating his own track record. Horace’s post today, “Is Android Responsible for Apple's Deep Market Discount?” was priceless! Here’s an excerpt:
“At last night’s closing price Apple was trading at a P/E of 16.3. Excluding cash, that ratio was at 13. On a conservative forward basis (my estimates) the stock is priced at less than 10 times next twelve months’ earnings.
These figures show a remarkable pessimism that has persisted around Apple for years. It was slightly, but not much, worse during the great recession. It persisted whether the company was growing at 30% of, as now, 95%.
There are many hypotheses about why Apple’s earnings and growth are considered worthless. They come and go with the whims of the age: recession, elitist, luxury branding, health issues, macro “headwinds”, earthquakes, phantom competition.
Lately it’s become fashionable to blame Android….
Since Apple is trading at a fraction of (a) historic multiple (b) multiple based on growth (c) comparable companies’ multiples then we can assume that a “normal” valuation would be twice the current (i.e. a multiple of about 32). That would still be a discount to growth and history but it would begin to match some of the comparables. A doubling of the P/E would be a good start.
But a multiple of 32 would imply a doubling of market cap, which means that the Android hypothesis is causing the evaporation of about $300 billion in future profits. So it stands to reason that it’s responsible for a $300 billion destruction of Apple shareholder value.
That’s an interesting number since Google itself is only worth about $169 billion.
The measurement then presents a remedy: If Apple bought Google (it already has a third of its value in cash) and it shut down Android, it could create $300 billion in value. IT could even throw away all of Google and still walk out with a profit.
Seems like a great bargain.”
~ Horace Dediu
This is wonderful tongue in cheek analysis, Horace!! (Or could it come to pass?) Personally, I think Steve Jobs may be one of the only founders who probably likes the fact that Apple stock is undervalued. If customers love your products and your experience and throw money at you, and you have enough cash flow to do anything you want, why does the stock price matter? Irrational Reaction to a Broken Computer I should be annoyed. My MacBook Pro died two weeks after its three-year warranty expired. Instead, I was delighted to have an excuse to treat myself to a shiny NEW MacBook Pro. (That’s the irrational part! When you are so in love with a company’s products that you can’t wait for it to fail so you can rationalize buying a new one!) Hats Off to Time Machine! I was also startled by how seamless it was to restore (almost) everything from my old machine to my new one using Apple’s Time Machine backup software. I’ve tried other back up services before. I use Dropbox in the cloud. I have lots of stuff stored on Amazon’s EC3, as well as a new Amazon personal cloud back-up. With all of those, you can download and recover your files. But the magic of Time Machine is that you have all of your applications, profile settings, and all of your files. Your last machine just reconstitutes itself on your new machine. You can just “move in” to your new machine. Since I had an older operating system on my previous Mac, a few of the apps complained because the newer OS required an application upgrade. The only things that didn’t work well were those that I excluded from my Time Machine backups (and the files that I hadn’t backed up because I didn’t keep Time Machine running all the time, but rather took weekly snapshots—lesson learned!). Time Machine in the Cloud? As I was thinking about what I’d really like to have for automated back up, I realized that it would be a combination of Time Machine (with the security of having everything backed up on a local drive) AND my entire “machine” encrypted in the cloud. Sure enough, that’s what Dolly Drive does. I found a review of Dolly Drive by googling “Time Machine in the cloud” and I found this review by Dave Caolo, here’s an excerpt: Dolly Drive Syncs Time Machine to the Cloud; Creates Bootable Back Up “… .First, it allows Time Machine to behave just like Time Machine. The primary difference is that your backups live out in the cloud instead of locally…. Next, Dolly Drive offers the security of being able to back up from almost anywhere…. The third interesting part is cloning…. Most of us have been using Time Machine to back up to a local drive … Dolly Drive doesn't want to abandon that drive. In fact, the app will create a local duplicate, or even duplicate your OS, creating a bootable external.…solution.”
So naturally, I signed up! The only downside I see with Dolly Drive in practice is that this is a service Apple is highly likely to offer as it rolls out its cloud strategy. Maybe Apple will just buy Dolly Drive. Apple certainly has enough cash lying around!
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