PDA

View Full Version : At $300 per share, Apple joins the high-priced elite, where ...


MacBytes
Oct 15, 2010, 11:29 AM
http://www.macbytes.com/images/bytessig.gif (http://www.macbytes.com)

Category: 3rd Party Hardware
Link: At $300 per share, Apple joins the high-priced elite, where the rules are somewhat different (http://www.macbytes.com/link.php?sid=20101015122918)
Description:: Apple Inc. (AAPL) recently touched and surpassed the $300 per share price level for the first time ever, placing it firmly in the sphere of high-priced stocks

Posted on MacBytes.com (http://www.macbytes.com)
Approved by Mudbug

akm3
Oct 15, 2010, 01:03 PM
This article makes absolutely no sense.

NewSc2
Oct 15, 2010, 01:17 PM
It just joined elite stocks, which include Goldman Sachs at $152 and Mastercard at $233? What about AAPL at $250?

twoodcc
Oct 15, 2010, 04:56 PM
another good day for apple's stock! closed today at $314.74!

theOtherGeoff
Oct 15, 2010, 05:53 PM
for the simple investor's sake, a stock split would be emotionally beneficial - most like to buy 'whole stocks' and with transaction fees, buying one stock for for 300 plus $10 transaction fee sounds expensive... but if you did a 10:1 split, you'd get the 10 shares for 300 with the same $10 transaction fee... you 'own' the same amount of company at the same cost basis.

But the article claming stock price = 'elite' status... hardly.

It's definitely elite status once it climbed into the top 10 of Market Cap, probably top 50... Or Nasdaq 100, or whatever... $300 ... not a big deal.

Capturing Exxon Mobile and being the largest Market Cap company... that would probably make it uber elite. Or the largest profit...

Or more importantly when it's product decisions drive entire industries (Flash RAM, touch screens, chip Fab, etc).

foobarbaz
Oct 16, 2010, 04:06 AM
Yeah, the article is completely bogus:

For one thing, it is nearly impossible for the average retail shareholder to directly own a meaningful number of shares in these companies.

The hypothesis of the article is: A stock split would increase that number and affect volatility. That's BS, of course. The "number of shares" is completely meaningless. It's the percentage of institutionally owned stocks that counts. And that is kept high by the large market cap., not by the stock price. A split has no effect.

And no, the psychological factor of being able to affort "10 times as many shares" is negligible in a multi-billion dollar business. As if small-times investors had the biggest influence on stock prices...

But yes, the rules are different now for AAPL. A large market cap leads to P/E compression. For most investors it seems unlikely that the 2nd biggest company can keep growing as fast as Apple has in the past. And much of the stock price is anticipated growth. Despite of this, I'll keep my stock for a long time.

liavman
Oct 17, 2010, 12:38 AM
A large market cap leads to P/E compression. For most investors it seems unlikely that the 2nd biggest company can keep growing as fast as Apple has in the past. And much of the stock price is anticipated growth.

foobarbaz, I agree. One question. Is there some thumb rule that is used to ball park this P/E compression? Not too many people talk about and it is an important aspect for high market cap stocks.

Several people have asked me why Apple's P/E is only in the low 20s when their growth rate has been in the thirties. Normally, the market pays Growth+10 or atleast Growth. So there is definitely that P/E compression that you speak of.

In discounting future growth, only the next 5 to 6 years really matter. The contribution of those outer years' growth rate diminishes farther you go out. If we take 24% annual growth, then in 6 years, Apple will have approx. 4 times the current revenue and earnings. That indeed sounds like a lot but not impossible.

Apple is a well diversified company: Mac, iDevices and digital downloads. All of them seem to have capacity for growth

If I go by my ( growth+10 ) measure, it looks like the market really believes that the long term growth rate for apple is only in the 10-12% range.

So, back to my question, how do you factor in the P/E compression as a function of market cap?

jdiamond
Oct 17, 2010, 12:50 PM
If I go by my ( growth+10 ) measure, it looks like the market really believes that the long term growth rate for apple is only in the 10-12% range.

So, back to my question, how do you factor in the P/E compression as a function of market cap?

There may be many psychological heuristics that people go by, but they're all meaningless unless a very significant minority of the people trade by them. The question is what manner of investment you consider stocks to be. If you believe that stocks ultimately represent the value of a company, and that in a worst case, selling off a bankrupt company could recover your assets, than most people don't go above a P/E of 5, implying that the company will grow to 5x the size it is now. But of course, the stock value of a company can fall below the company's real value, and these day's there's very little relationship between the two.

Other people simply look at a stock investment like any other, and ask "will the dividends + expected increase in stock value be a better rate of return than my other choices?" In this case, the only effect of a high P/E ratio is that the higher the P/E, the more likely it is that there will be a large correction in the stock value, hence the "compression" effect. But this is nothing more than observing the disconnect between the stock value and the company's worth as a form of risk - even Apple is extremely unlikely to achieve 20 times their current size - that would mean revenue in excess of $1 trillion per year.

liavman
Oct 17, 2010, 06:31 PM
P/E of 5, implying that the company will grow to 5x the size it is now.

How do you come to that conclusion? A stock which does not grow at all in terms of earnings, can still fetch a P/E of 12.5 . Let us say its earnings today is $1.00 and the discount rate to be used is 8%. That is, the rate at which the future earnings of this company are converted to present value. If you did the math, you will see that the sum of all those earnings will equal 12.5. That is the P/E, because in this model, that is the 'P' and 'E' as per our starting point is 1 and so the P/E is 12.5/1 = 12.5 for that discount rate. So at 8% discount rate, the zero growth rate P/E is 12.5

The Zero growth rate P/E is basically ( 1 / discount rate )

When I use the measure ( growth + zero growth PE ) as a thumb rule, I arrive at that ( growth + 10 ) by using a discount rate of 10 and so the zero growth rate P/E is 1/.1 = 10

Of course, if there is negative growth ( like your bankruptcy scenario ), that has to be factored in but the above simple and trivial model works reasonably well for zero or positive growth. Except this P/E compression thing when the company gets to be huge like Apple. I am curious how I can adjust this simple model for such situations.