Apple Inc. (NASDAQ:AAPL) had a price to earnings ratio of 12.14 at market close yesterday, according to Wolfram Alpha. A stock with that kind of P/E ratio, particularly in the technology market, is not expected to grow that much. But this is not the case described by analysts.
According to the averages from 52 analysts questioned by Reuters, Apple Inc. (NASDAQ:AAPL) is expected to bring in revenue of $191 billion in FY2013. Earnings per share are expected to be $48.72 in the same period. This contrasts with the Fy2012 results of $160 billion in revenue, with earnings per share of $38.81.
The analyst estimates show that revenue is expected to increase by more than 19% in the next year, while earnings are expected to increase by about 25.5%. These are not figures for a company that isn't going to grow, and they certainly do not necessitate a P/E of 12. That P/E, by the way, includes the firm's cash reserves. Without cash the company's ratio is trailing somewhere closer to 10.
So where is the discrepancy coming from? Many have postulated that the company's stock is at such low price levels because hedge funds, and other institutional investors, aren't buying it any more. The reason they aren't buying is because they've already reached the quotas they've imposed on single stocks, not because it is unattractive.
If this is the case, it would represent a failure of the stock market. The market is supposed to be made up of so many small players that such a bottleneck doesn't occur. The problem according to those holding this thesis, is that retail investors, scared off by headline pressure, are not investing in the firm.
An article in Forbes, published last July, postulated that limits on institutional ownership would mean that those investors, having reached their limits, would have to sell their stock as soon as it appreciated, in order to keep within their constraints. That would mean that every rise in stock would be associated with a dump onto the market, keeping the price constrained.
This is a neat argument that seems to explain the trend of Apple Inc. (NASDAQ:AAPL) stock in recent months, but it fails to explain the September rise to over $700 among other incidents. The theory may describe a part of the market's action on this, but doesn't explain it fully.
The real problem is that with a P/E of 12, Apple Inc. (NASDAQ:AAPL) is not expected to grow much next year. With Analyst expectations of 25% earnings growth, the stock is expected to boom. There is an analytical dissonance here. Both facts cannot be true.
Apple Inc. (NASDAQ:AAPL) will probably sell more iPhones and iPads next year than ever before. Mac sales are expected to increase, and the iPad mini may reach out to a new market. The company will, barring a system shock, earn more in 2013 than any year before.
But the company's stock price might not rise, despite great results. There's certainly a good chance it won't rise at the same rate. Apple's earnings grew by 57% between 2011 and 2012, the firm's stock grew by just 31%. There's no reason to expect 2013 to be any different.