Uh Oh - Apple's (AAPL) Forward P/E Eclipses Market Multiple
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After trading higher earlier, shares of Apple (Nasdaq: AAPL) reversed lower intra-day, creating a frenzy among market participants. And while people are quick to put reasons to explain the decline it really comes down to one thing - valuation.
With its recent run-up, for the fist time in a long-time Apple's forward PE has eclipsed the market multiple.
At $661 per share, Apple is trading at 15x FY12 EPS estimates. Meanwhile, the market multiple on the S&P 500 is 14.40.
In addition to a red hot stock price, another reason that Apple has quickly passed the market multiple is the fact that EPS estimates have come down 14 percent in the last four weeks alone.
Very smart investors have used the story of Apple trading below a market multiple as an argument to own the stock. Here is what David Einhorn said at his annual Partners' Dinner in May:
"Not only do we think the skeptics are misguided, we believe the shares remain cheap. Apple Inc. trades at a lower multiple than the average company in the S&P 500. A below-market multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks Apple as below average."
Also, of note is the fact that the multiple on the S&P has been rising sharply. At 7/31 it was 13.98 and at 6/29 it was 13.79 and 5/31 it was 13.27. So, Apple's multiple is now rising faster than the S&P 500's.
While many will argue that Apple deserves to trade at a higher multiple than the market, with slowing growth rates there are risks that investors need to explore. If Apple continues separate from the market multiple into the expected September 12th iPhone 5 announcement, some investors may be forced to take some off.
Shares of Apple are down 1.1 percent to $658.12.
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With its recent run-up, for the fist time in a long-time Apple's forward PE has eclipsed the market multiple.
At $661 per share, Apple is trading at 15x FY12 EPS estimates. Meanwhile, the market multiple on the S&P 500 is 14.40.
In addition to a red hot stock price, another reason that Apple has quickly passed the market multiple is the fact that EPS estimates have come down 14 percent in the last four weeks alone.
Very smart investors have used the story of Apple trading below a market multiple as an argument to own the stock. Here is what David Einhorn said at his annual Partners' Dinner in May:
"Not only do we think the skeptics are misguided, we believe the shares remain cheap. Apple Inc. trades at a lower multiple than the average company in the S&P 500. A below-market multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks Apple as below average."
Also, of note is the fact that the multiple on the S&P has been rising sharply. At 7/31 it was 13.98 and at 6/29 it was 13.79 and 5/31 it was 13.27. So, Apple's multiple is now rising faster than the S&P 500's.
While many will argue that Apple deserves to trade at a higher multiple than the market, with slowing growth rates there are risks that investors need to explore. If Apple continues separate from the market multiple into the expected September 12th iPhone 5 announcement, some investors may be forced to take some off.
Shares of Apple are down 1.1 percent to $658.12.
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*NEW - Download StreetInsider's FREE iPhone and iPad App - Click Here
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