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Erik's Spin


Is Apple's Stock Really Worth $18,000 a Share?

14 Feb, 2012 By: Erik Gruenwedel

In the tumultuous world of Wall Street, determining just what a tech company really is worth can be an exercise in crazy making.

Take Apple Inc., which recently reported a record fiscal quarter generating $13 billion in profit on $46.3 billion in revenue. Its stock Feb. 14 is trading at around $503 per share, or 11.78 times projected annual earnings of $42.69 per share. The P/E ratio is determined by taking Apple’s stock price (P) and dividing it by estimated annual earnings (E).

In other words, it would take someone buying a single share of Apple 11.8 years to recoup the purchase price based on annual earnings and ignoring inflation and other issues. The P/E ratio underscores a stock’s demand on the market, which, of course, doesn’t necessarily reflect its actual value.

While stock trading at $500 a share might be considered high to the casual observer, Apple’s P/E ratio actually is below that of the S&P 500 with a current P/E ratio of 13.5. If the S&P ratio was applied to Apple, its stock price increases to $576.31 per share.

Now factor in Netflix and Amazon, two peer media tech stocks with stratospheric P/E ratios unlike Google (P/E 14.5) and Microsoft (P/E 11.4).

Amazon has a P/E ratio of 78.8, while Netflix’s P/E ratio is an astounding 422.5. Amazon’s diversified product mix is reflected in its P/E ratio as much as the reality that ecommerce is the future and the Seattle-based company is firmly in the driver’s seat.

For Netflix, its stock currently is trading at $123 per share, despite a projected annual loss of 26 cents per share. In fact, Netflix’s meteoric P/E ratio would appear to confound logic and yet underscores its front-runner status in what investors believe is a burgeoning streaming video marketplace. In other words, Netflix — despite recent PR gaffes — remains a speculator’s dream.

“Not even the Fed can print enough money to cover a price that high,” according to a post by Bespoke Investment Group, which conducted the analysis on theoretical share prices.

Applying Netflix’s P/E ratio to Apple’s stock results in an outsized valuation of $17,998 per share. Of course such a valuation is unrealistic, but it does shed light on the vagaries of the stock market and underscores the reality that valuing a company’s stock — when compared to its peers — can be subjective.

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