Author: Horace Dediu

Of all the world’s companies, Apple ranks as the 11th most valuable. As a technology company its market capitalization is second only to Microsoft.

Of the top 20 largest companies, all of which are above $150 billion in market cap (listed in graph above), Apple has the highest volume of trading as measured by dollar value (average volume multiplied by last share price is $5.2 billion per day–see graph). In fact, it’s more than twice as popular as a traded equity than the next highest, Google and 2.6 times as popular among traders as Microsoft.

This trading volume might also be reflected in its beta (the correlation of price with the market with 1 meaning perfect correlation). Apple’s Beta is 1.59, nearly the highest of the super-large caps and the highest by far of the tech large caps.

Surely, this confirms that Apple is not only huge but hugely popular and highly visible among investors. Suggestions that its current discounted value is due to obscurity among IT buyers translating to obscurity among investors does not wash.

Source: Google Finance

On Christmas Eve 2007 to be precise. That’s when the Enterprise Value/share was $181.5. These days it’s around $150. The Enterprise Value (EV) measures the value of future cash flows excluding current assets and is a better indicator of the potential of a company than its current overall value.

As you can see in the graph above, the cash per share (in green) has grown to $43 while back in late 2007 it was less than half that. As a result, although the market value for Apple peaked at $215 on 19th January this year (the blue line), the EV/share was only about $178 (the red line), below the all-time-high in 2007.

As Apple’s cash continues to grow, the gap between EV and MV will also grow. If the MV remains low (as the P/E is indicating) then the Enterprise Value, i.e. the net present value value of future cash flows, drops.

Did Apple’s prospects peak in 2007–six months after the iPhone was first launched–or is the current valuation still a function of sentiment of the overall economy, independent of the company’s fundamentals?

Apple’s profit of $3.38 billion for CQ4 was slightly more than 10 times bigger than Dell’s $334 million on nearly equal Revenues of 15.7 billion and 14.9 billion.

In other words, Apple kept about 20% of its income while Dell kept 2%. Also worth noting is that Dell’s gross margin onconsumer PCs was 0.2% while Apple’s Mac margin (mostly sold to consumers) was around 28%. So on consumer PCs Apple’s margin was 140 times higher.

It should not be a surprise then that Apple is worth 6.5 times Dell.

To recover some of its margins Dell is rumored to be readying its iPad competitor.

I can’t wait.

Following up on the Apple Valuation Entry, I went to the data and pulled the historical P/E for Apple back to include all of 2004 (in blue) and did the same with the S&P P/E (in red).

A few notes:

• Apple’s P/E was consistently above 30 until mid-2008
• Apple’s P/E was consistently and substantially above the S&P until mid-2008 by at about 10 to 30 points.
• A reversal occurred at that point with S&P P/Es reaching record highs (actually at over 120 in May) and Apple’s reaching record lows of 11 at a time when the S&P P/E was over 60.
• Since the reversal, Apple’s P/E has been consistently below the S&P’s and indeed has stayed near historic lows while the S&P is returning to historic averages.

This reversal happened during a time of recession when, in contrast to most companies, Apple kept growing. The spike in the S&P P/E is due to a dearth of earnings, while Apple had increased earnings, sometimes to new records.

As a “premium” brand it’s perhaps perplexing that Apple seems to be acting as a counter-indicator to macroeconomic conditions.

Expectations for Apple to decline in times of economic contraction did not come true and as recovery seems near, Apple appears to be discounted.

In other words, when times are bad, Apple surprises and does well so therefore when times are good Apple should do badly.