It’s been six months since Steve Jobs resigned as Apple’s CEO. That day, Aug. 24, 2011, the company’s stock closed at $377 per share. Jobs’ departure—and, of course, his death—was an event investors had feared for years, and many believed it was the primary reason that Apple’s stock had not kept pace with its stellar financial results. Sure, Apple’s share price had risen dramatically over the previous five years. In 2007, just after Jobs unveiled the iPhone, Apple’s stock was selling at about $85; by the time of his resignation, it had risen more than 350 percent.
But over the same period Apple’s revenues grew even faster, meaning that its stock price relative to its earnings kept declining. The technical term for this measurement is “price-earnings ratio,” and in general, the lower the number, the “cheaper” the stock. Apple’s P/E ratio has hovered around 14 over the past year. That’s lower than most other stocks in the tech industry. Google has a P/E of about 20. Amazon’s is 139. Even beleaguered Yahoo has a P/E of 18. (To be sure, Apple’s not the lowest: Microsoft’s P/E is around 11, and Hewlett-Packard’s is 7.2.)
In six months without Steve Jobs, Apple has done spectacularly well. Three weeks ago, it announced quarterly revenues of $46 billion and profits if $13 billion, double the same period last quarter. And its stock price has climbed as a result—on Wednesday, it closed at $497, up about 30 percent over the last six months. That’s a better performance than Google (up 9 percent), Microsoft (17 percent), the Nasdaq index (14 percent), and the S&P 500 (12 percent). Still, even at more than $500 a share (a benchmark Apple broke earlier this week), its P/E is still among the lowest of all big tech firms.
In other words, Apple’s stock is cheap, and you should buy it. I don’t normally offer investment advice (so feel free to disregard what I say, but don’t come crying to me when you’ve squandered your money elsewhere). I’m usually more interested in companies’ products than their stock performance. But with Apple’s share price and earnings hitting unbelievable new highs, there’s bound to be a sense among investors that the company is somehow approaching its natural peak, and that it won’t be able to maintain its good fortune for much longer. Case in point: Apple’s shares were down 2 percent on Wednesday.
Don’t succumb to that view. Not only is Apple not peaking, it is likely not even close to reaching its potential earnings in its two biggest markets, smartphones and tablets. Indeed, I suspect that one of the reasons Apple’s share price is so low is that it has been difficult, on a purely perceptual level, for investors to understand the financial opportunities the company is poised to realize. The numbers are just too big; it simply doesn’t seem possible that a single company could capture such a large part of the market. But not only is it possible—it is happening. The iPhone accounts for only 9 percent of the market share in smartphones, but Apple is earning 75 percent of the profits in smartphones. Its dominance in the tablet market is even more staggering.
The most impressive thing, though, isn’t Apple’s performance within each of these businesses but the rate at which the overall markets are growing. As the amateur Apple analyst Horace Dediu has pointed out, today, only three of every 10 phones sold in the world are smartphones. All the rest are dumbphones. But that number is growing rapidly—more and more people keep switching from basic cellphones to iPhone-like smartphones. There’s a good chance that Apple won’t get the majority of those switchers; a lot of those people are likely to choose cheaper alternatives, especially phones that run Google’s Android OS. But because Apple makes so much more money on each phone than any of its rivals, its profits will still be unbelievable. Last quarter, Apple sold 37 million iPhones. If the iPhone’s sales growth simply keeps up with the rate of growth of the smartphone market, Apple will be able to sell more than 50 million next holiday season—and if it does that, it could see the most profitable quarter in U.S. corporate history.
And that’s just the iPhone. The iPad’s prospects could be even more stellar. Given their relative growth rates, it now seems likely that sales of tablet PCs will overtake those of traditional PCs in a just a few years’ time. And Apple is the undisputed king of the tablet market, the only company selling millions and making billions doing so. (Amazon seems to be selling millions of Kindle Fires, but it’s not making much money doing so.) You may argue this can’t last; over the long run, as better rivals enter the market (I’m especially looking forward to Windows 8 tablets), Apple will likely see its market share decline. But it would be foolish to argue that Apple will face a dramatic slip in this market anytime soon. It sold 15 million iPads last quarter, and it’s doubling that rate every year. In just the tablet business alone, Apple could be what Microsoft represented in the PC market—the most profitable stakeholder in the tech world’s most prosperous new marketplace.
And my analysis doesn’t even include Apple’s other current and potential products—the Mac, which is seeing amazing growth even in a depressed PC market, and Apple’s possible entrance into the TV business (about which I’m skeptical, but we can talk about that when the time comes). Most importantly, though, I’ve got high expectations of CEO Tim Cook. At a Goldman Sachs investors summit this week, Cook’s lengthiest public appearance since Jobs’ death, the new CEO showed himself to be an incredibly nimble assessor of Apple’s challenges and its opportunities. He gave detailed and reassuring answers about the steps Apple is taking to improve working conditions at its contract-manufacturing firms. He also suggested that Apple might be open to returning some of its cash holdings to investors as dividends, which would certainly beget an enormous boost to its stock price.
There has long been a worry that Cook won’t be able to sustain Apple’s innovative streak, and that he won’t have any chance of matching Jobs’ masterful product-unveiling keynotes. I think that’s probably true; maybe next month’s iPad 3 announcement won’t feel as magical as Jobs’ performances. But Apple’s future isn’t in magic. It’s in math. There are big markets ahead, and no other company has a better opportunity to capture them. Do yourself a favor: Instead of buying the next iPad, buy one share of AAPL. Unlike the tablet, it will only get better with time.
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