Apple juggernaut gets little investor respect

January 25, 2012 By PETER SVENSSON , AP Technology Writer
In this March 25, 2011 file photo, customers wait outside the Apple store in Munich before the start of sales of the iPad2. Apple has again surpassed Exxon Wednesday, Jan. 25, 2012, as the most valuable U.S. company after a huge fiscal first quarter. (AP Photo/dapd, Lukas Barth, File)

(AP) -- Apple is worth $415 billion, putting it neck and neck with Exxon Mobil as the world's most valuable company. But by standard Wall Street measures, its stock is a bargain.

Why aren't investors giving the company full credit for its enormous profits and staggering growth?

There's a big discrepancy between Apple's earnings and its , and it became even more glaring on Tuesday, when the company reported results for its latest quarter. The well-managed launch of the 4S and the ever growing popularity of products around the world conspired to send earnings and sales zooming past analyst estimates.

Apple's sales were $46.3 billion in the quarter that ended Dec. 31, up 73 percent from a year ago. That's more than twice the revenue of its old nemesis, .

Net income grew 118 percent to $13.06 billion. That's more than Inc.'s revenue for the quarter.

Investors cheered -sort of. Apple's stock rose 6 percent Wednesday, hitting a new all-time high of $454.45.

But analysts who do the math find that, based on the earnings expected this year, the stock should be trading much higher. Before the , 45 Wall Street analysts who follow the company believed, on average, that Apple should be worth about $556 per share. After the report, the analysts rushed to raise their estimates, some as high as $650.

That means Apple shares trade at a discount of 25 percent to 50 percent compared to its projected earnings for the coming year.

"This isn't supposed to be happening to a company of this size," said David Rolfe, chief investment officer at Wedgewood Partners Inc., manages a $150 million fund where Apple is the largest component. "In our collective investment experience, none of us have ever seen this before."

There are two main reasons for the missing hundred-dollar bills in Apple's stock price.

One is Apple's policy of hoarding the cash it makes, like a dragon resting on a pile of gold. It doesn't share any with investors through dividends or buybacks, like many other companies do. The policy is all the more striking when you consider the size of the cash pile: $97.6 billion. That's enough for a $100 special dividend for every Apple share.

For years, analysts have been pressing Apple for a plan to do something with the cash. The company's standard response has been that the cash gives it flexibility to buy other companies and strike long-term supply deals.

But on a post-report conference call with analysts on Tuesday, chief financial officer Peter Oppenheimer hinted that a change might be in the air, saying the board is in "active" discussions about what to do with the cash.

"I'd be surprised if there wasn't a dividend by the end of calendar-2012," said Michael Walkley, an analyst with Canaccord Genuity.

The dividend would be important, not so much because it would directly reward shareholders, he said, but because it might vastly expand the number of investment funds that would be allowed to buy Apple stock.

Growth-oriented funds already own a lot of Apple shares, and can't stomach any more. Apple has "run out of room," in the words of analyst Toni Sacconaghi at Sanford Bernstein.

Meanwhile, value-oriented funds have rules against buying companies that don't pay dividends, and own few Apple shares, he said. He, too, thinks it's likely that Apple will institute a dividend, which would raise the stock price by broadening the range of funds that will own Apple.

The other main reason for the low stock price appears to be that Apple has grown so big, so fast. Investors and analysts have refused to believe that a company of that size can grow at an annual rate of 73 percent, like it did in the latest quarter.

have been "woefully conservative on Apple," Rolfe said. "The mantra has been: Hey, a company this size just cannot keep growing at these unbelievable rates."

Scott Sutherland, an analyst at Wedbush Morgan, does believe Apple's earnings growth will slow. But even if today's breakneck pace can't hold up, and growth moderates to 21 percent per year, the shares are still worth $585, he said.

There's no sign of growth slowing this year, however. Apple is expected to launch the iPad 3 in a few months, and perhaps a TV set some time this year. This summer, analysts expect an iPhone with a new look and the ability to use Verizon Wireless' and AT&T Inc.'s new high-speed "LTE" data networks. That would be the biggest iPhone launch in years, Sutherland said.

"It will crush the iPhone 4S launch," he said.

Explore further: Apple doubles iPhone sales in 1Q (Update)


Related Stories

Apple doubles iPhone sales in 1Q (Update)

January 24, 2012

The iPhone is taking over Apple. For the first time, the device that changed how people use mobile phones, accounts for more than half of the behemoth company's sales.

Apple shares soar, edges ExxonMobil in market cap

January 25, 2012

Apple shares soared on Wednesday following blockbuster quarterly earnings and the California gadget-maker leapfrogged over ExxonMobil to become the largest US company in terms of market value.

Recommended for you

World's biggest battery in Australia to trump Musk's

March 16, 2018

British billionaire businessman Sanjeev Gupta will built the world's biggest battery in South Australia, officials said Friday, overtaking US star entrepreneur Elon Musk's project in the same state last year.

1 in 3 Michigan workers tested opened fake 'phishing' email

March 16, 2018

Michigan auditors who conducted a fake "phishing" attack on 5,000 randomly selected state employees said Friday that nearly one-third opened the email, a quarter clicked on the link and almost one-fifth entered their user ...

Origami-inspired self-locking foldable robotic arm

March 15, 2018

A research team of Seoul National University led by Professor Kyu-Jin Cho has developed an origami-inspired robotic arm that is foldable, self-assembling and also highly-rigid. (The researchers include Suk-Jun Kim, Dae-Young ...


Adjust slider to filter visible comments by rank

Display comments: newest first

not rated yet Jan 25, 2012
So, Apple is worth a lot, but not as much as they should be due to the fact that Apple hordes their money. IE: No dividends and no buyback of stocks.

Plus no one is investing because of the reasons above or, because they don't think Apple can make that much profit again, and I would bet another reason is Steve Jobs is no longer with us, and Apple.
not rated yet Jan 25, 2012
Apple would not be making so much money if it did not overcharge for its products. Remember most of its products are made in china by slave labor making around $1/day.
And guess what, Apple keeps its money abroad ( google it if you don't believe it ) so every time an American buy an Apple product he/she is working against him/herself since Apple does not pay taxes on the money it keeps abroad. Neat, the combination of slave labor and hoarding money abroad.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.