If anyone's confused by the stock price, it's simple. Profits are flat since this time last year. This time last year the stock was around $420 and that's where the stock is heading today.
So, yeah, I guess I'm kind of confused now by the market reaction. Perhaps you can explain to me again the rationale? But perhaps I shouldn't be confused, really. I should finally learn from history to not overestimate humanity.
Joe Bull thinks maybe Apple will have a super blowout beat $60 bln quarter the way last xmas quarter beat estimates by a mile. If so the stock will go north of $600 fast, maybe push $700. Didn't happen so he sells.
If a company made $1m last year and is expected to stay flat for the next decade, it's worth $10 million.
If a company made $1m last year and profits are expected to grow 10% annually, it's worth $16 million.
If a company made $1m last year and profits are expected to grow 100% annually, it's worth $1 billion.
The implicit model for stock pricing is more complicated, but you can see correlations even in a simple model like this.
Nobody knows what will happen several years into the future, so it's mostly bets and speculations. Especially in high-growth companies, where many of the bettors appear to believe that trees grow to heaven, and the company's yearly profits will soon exceed the world GDP.
So the stock of high-growth companies sell at an enormous markup compared to current profits. By the same token, that markup can evaporate very quickly if a formerly-high-growth company shows any sign of slowdown.
In terms of the simple model above: If traders used to think that the $1m-profit company would grow 60% annually for the next decade, and something happens that makes them believe that it won't be more than 40%, the value of the company would immediately drop by more than 60%.
So at least according to the "a company is worth X years of future earnings" model, Apple is priced as a company that will grow even less than IBM and Microsoft over the next X years. Or perhaps it's priced to grow a bit more in the immediate future, but to start declining after that.
There are certainly other factors at play as well, but I don't know them well enough to enumerate them.
My main point was simply that when you think of "present company value" as the integral (the area under the graph) of the earnings graph far into the future, and add growth rates and fluctuating uncertainty, several non-intuitive aspects of company pricing start to make more sense. Even if it doesn't explain everything.
Apple has had a few quarters where year-over-year growth was around 100% (last in Q1 2011), that hasn't been the case in the last few quarters.
The market may be overreacting, but given that investors look at graphs like this and try to project the growth trajectory from the past few quarters several years into the future, pricing Apple a bit below Microsoft in terms of P/E doesn't seem all that unreasonable.
But to justify a higher price today you would have to believe that apple is more competitive in the overall market this year than it was last year and I don't think it is.
Also, growth of growth is flat, not actual growth which is still quite positive.
Last year they made $25 billion, this year they made $41. But of course the rate of growth is smaller than the year before last when they only made $14 billion. This according to Wall St means they are failures.
Lets put it this way, APPL's earnings growth is twice GOOG's total earnings.
No, it doesn't. (edit: they are failures when it comes to keeping up their growth rate, yes.) But if previous stock price was arrived at by assuming rate of growth would stay constant, the stock will drop if rate of growth drops, as according to best available prediction the company will be worth less in the future than you had previously expected.
Stock prices are influenced by all kinds of predictions, guesses, and voodoo for present and future. It's a good idea to not to attach too many personal feelings or judgments like "winner," "best," or "failure" to the stock for this reason.
1. Revenue slightly below estimates. Analysts knew that this quarter was a week short and built that into the estimates.
2. Profit MARGIN way down from year-ago-quarter. It doesn't matter that this quarter is short, it's the ratio of profit to revenue, not the gross amount of profits. Also, profits short of expectations, and, again, the short quarter was built into expectations.