Throughout the extraordinary surge in Apple Inc. (AAPL)’s share price, a persistent question has lingered: Why is the stock still so cheap? One overlooked answer may be that Apple’s accounting isn’t as conservative as it used to be.
After topping $500 a share this week, the iPhone and iPad maker now has a $468 billion market capitalization. Yet Apple trades for only 14.3 times its earnings for the previous four quarters -- about the same as the Standard & Poor’s 500 Index’s price-earnings ratio -- in spite of growth that’s far above average. Revenue last quarter rose 73 percent to $46.3 billion, while earnings more than doubled to $13.1 billion.
Many theories have been floated for why such a rapidly expanding company with such loyal customers would trade for so little. Perhaps investors believe Apple will cling to its $97.6 billion hoard of cash and marketable securities, rather than pay a fat dividend. Others have suggested a lack of confidence about the future. It’s a consumer-electronics company, after all, and competition is brutal.
While each of those points has merit, here’s an explanation that hasn’t gotten enough attention: Thanks to an accounting- rule change for which it lobbied, Apple gets to book revenue from sales of bundled products such as iPhones -- which include hardware, software, services and upgrade rights -- more quickly than it used to. In short, one reason Apple’s earnings have been so high is accounting inflation, and the market realizes this.
The easiest way to see the rule change’s impact is to look back at the two sets of numbers Apple reported for fiscal 2009. Originally, the company said it had $5.7 billion of net income for the year on $36.5 billion of revenue. Then in January 2010 Apple retroactively adopted the new accounting principles and restated its previous numbers. The restatement boosted Apple’s fiscal 2009 net income 44 percent to $8.2 billion. Revenue was revised to $42.9 billion, 17 percent higher than originally reported.
Nothing changed economically, of course. Only the accounting did. On the surface, though, Apple’s valuation looked cheaper under the new reporting regime than under the old one.
On Dec. 31, 2009, for instance, Apple had a market capitalization of about $191 billion. Using the fiscal 2009 earnings that Apple initially reported, its price-earnings ratio that day was about 33. Using its restated numbers, the ratio would have been about 23. My guess is a similar effect is occurring today: Had it not been for the rule change, Apple’s P/E ratio would be higher, because the “E” would be lower.
“It would appear that the market continues to consider a significant component of Apple’s revenues and gross profit to be presently unearned and not deserving of a normal market multiple,” said Charles Mulford, an accounting professor and director of the Financial Reporting and Analysis Lab at Georgia Institute of Technology in Atlanta.
Apple was one of a handful of companies that lobbied the Financial Accounting Standards Board for the new rules in 2009. The impact for Apple seems to have been greater than for most others, probably because of the nature of its products. Dell Inc. (DELL) said the rule switch had no material impact on its results. Microsoft Corp. (MSFT) and Oracle Corp. (ORCL) said the same. Hewlett-Packard Co. (HPQ)’s earnings got a slight boost.
The FASB rule change had two main parts. One related to so- called multiple-deliverable arrangements, while another covered software sales. When Apple sells an iPhone, for example, the hardware and software are delivered at the time of sale. Other deliverables include the rights to future software upgrades and other features.
The old accounting rules required Apple to defer large chunks of its revenue and recognize the amounts gradually over each product’s economic life. While the details are complicated, the gist under the new rules is that Apple is allowed to record more revenue upfront.
What’s unknowable is how much different Apple’s latest results would have looked had the FASB not amended its standards. There’s no way to tell from the company’s disclosures. Plus, Apple adopted the new accounting principles right before it introduced the iPad. An Apple spokeswoman, Kristin Huguet, didn’t return phone calls seeking comment.
Let me be clear: I’m not opining on whether Apple is overvalued or undervalued, and I’m certainly not making any predictions about its stock price. The point here is that it makes sense for Apple’s earnings multiple to have declined significantly once you consider how the company’s accounting has changed. Read More
Analysts at Oppenheimer (NYSE: OPY) upped their price target on shares of Apple (NASDAQ: AAPL) from $510.00 to $570.00 in a research report issued to clients and investors on Friday. They currently have an “outperform” rating on the company’s shares.
Separately, analysts at Barclays Capital (NYSE: BCS) reiterated an “overweight” rating on shares of Apple in a research note to investors on Tuesday. Analysts at Jefferies Group (NYSE: JEF) reiterated a “buy” rating on shares of Apple in a research note to investors on Tuesday. Also, analysts at Canaccord Genuity raised their price target on shares of Apple from $650.00 to $665.00 in a research note to investors on Thursday, February 9th. They now have a “buy” rating on the stock.
Apple Inc. (Apple) along with its subsidiaries is engaged in designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and Mac OS X operating systems, iCloud, and a range of accessory, service and support offerings. It also sells and delivers digital content and applications through the iTunes Store, App Store, iBookstore, and Mac App Store.The Company sells to consumers, small and mid-sized businesses (SMB), and education, enterprise and government customers. During the year ended November 24, 2011, the Company, as part of a consortium, acquired Nortel Networks Corporation’s patent portfolio.
Shares of Apple opened at 502.21 on Friday. Apple has a one year low of $310.50 and a one year high of $526.29. The stock’s 50-day moving average is $445.9 and its 200-day moving average is $402.3. The company has a market cap of $468.2 billion and a P/E ratio of 14.29. Read More
Compare to benchmark: DJIA S&P500 Global Dow NASDAQ Technlgy ... Dividend Yield: A company's dividend expressed as a percentage of its current stock ... Read More
Chart Cursor. Track Ball; Crosshair; Off. OHLC Values. On; Off. RESET. Compare AAPL to: Dow Jones (^DJI); NASDAQ (^IXIC); S&P 500 (^GSPC). Draw. Cancel ... Read More
Though its influence has finally waned somewhat in recent years, for over a century, the Dow Jones Industrial Average has been, and, for many, remains, synonymous with the stock market. News reports continue to proclaim “the market” is up or down, referring to this index.
Yet, the index consists of a mere 30 stocks, not particularly representative of the market, and is price-weighted- a nonsensical choice inferior to market-capitalization-weighted indexes such as the S&P 500, which, with 500 stocks is much more representative of the market as a whole.
The fine folks at Bespoke Investment Group often have fascinating insights. They recently published a fascinating article, showing what would have happened if Apple(AAPL) had been added to the index in June 2009 rather than Cisco(CSCO). This one single swap would have left the index 14% higher today, at an all time high. The fact that the selection of a single stock can lead to such a wide divergence in the index over such a short period of time should give anyone pause before paying any heed to this index.
The numbers, from Bespoke:
Even though AAPL was not chosen to replace GM, it is always fun to see what might have been. To that end, we have recalculated the performance of the DJIA to reflect how it would have done if AAPL was added to the DJIA instead of CSCO. The chart below shows the current DJIA (blue line) compared to the ‘Apple’ DJIA (red line). Currently, the DJIA is trading at a level of roughly 12,865, which is about 12.1% off its all-time high of 14,198.10 from October 2007. If AAPL was in the DJIA, though, the index would not only be significantly higher (14%), but it would also be trading at an all-time high of 14,636. Granted, you cannot go back and change the past, but we wonder if investor sentiment would be more positive if the DJIA was trading at record highs? Read More
MF Global Singapore has been ordered by the Singapore Exchange (SGX) not to take on new derivatives positions. SGX also ruled that the company may only reduce existing positions.
The Monetary Authority of Singapore (MAS) also issued a statement on Monday, directing MF Global Singapore "not to take on new positions with immediate effect in respect of all its regulated activities, except for reductions or liquidations of positions."
The MAS and SGX would continue to monitor the situation closely.
Meanwhile in New York, MF Global has filed for bankruptcy, after confidence in the firm was shattered by a string of losses from European public debt holdings.
The trade in MF Global shares was earlier Monday halted on the New York Stock Exchange as the New York Federal Reserve announced that the brokerage firm was "suspended from conducting new business with the New York Fed."
In a brief statement on its website, the New York Federal Reserve said the suspension will continue until MF Global shows it is fully capable of meeting its policy requirements regarding relationships with primary dealers or until it terminates MF Global's status as a primary dealer.
MF Global is one of 22 primary dealers at the New York Fed, with four added this year. Read More