Examining Apple’s Low P/E And How It Could Go Higher

Apple (NASDAQ:AAPL) has strengthened its position as the world’s most valuable company, with its stock price rising by close to 40% over the last 12 months. Its $730 billion market cap now stands at about twice as much as the next biggest company, and accounts for close to 4% of the S&P 500. However, despite the strong growth and track record of beating expectations, the market assigns Apple’s stock P/E multiple of just 14x FY 2015 earnings (still lower ex-cash), while the broader S&P 500 trades at about 17x projected earnings. ^[1] So what’s holding Apple’s stock back, and what could be the potential catalysts that could help it gain a higher multiple?

We have a $144 price estimate for Apple, which translates to a market cap of about $830 billion. Our price estimate is about 15% ahead of the current market price.

Growth Concerns

There are two primary reasons behind Apple’s low multiple. Firstly, there’s a concern over growth prospects. The law of large numbers – which implies that financial growth begins to slow for very large companies as it becomes difficult to find new markets to expand into – is likely to be something on the back of investors’ minds, given Apple’s size. Additionally, Apple’s fortunes are largely tied to the iPhone and any missteps around its product strategy could cost the company dearly. The iPhone accounts for about 60% of Apple’s revenues and over 75% of profits by our estimates. Additionally, while iPhone revenues grew at over 50% year-over-year during the last two quarters, all other product lines combined actually saw revenues shrink.

Driving double-digit growth rates over the medium-term could be challenging. Most of Apple’s current success is attributable to the iOS juggernaut, which has already disrupted several high-value industries. Finding other similarly large and profitable markets for expansion within Apple’s core domain won’t be easy. While rumors of Apple’s expansion beyond the consumer electronics/computer industry with products such as an Apple Car seem exciting, we wouldn’t assign a large probability to such products materializing.

In the interim, the equity markets could assign a higher earnings multiple to the company as it proves that it can sustain sales and protect its high margins (particularly for iPhone) over the longer term, while driving some incremental upside from other products. For example, if Apple were to be valued at a 17x forward multiple (on par with the broader S&P 500), this would translate to a price of $153/share, or a 22% upside from the current market price.

See the links below for more information and analysis:

• Key Takeaways From The WWDC And Their Impact On Apple’s Strategy
• Apple: Too Big To Grow?
• Trefis analysis: Apple’s iPhone Segment
• Trefis analysis: Apple Watch Segment

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Market Data Center, WSJ [↩]