> The market is highly adversarial, and if anyone were "keeping it down" artificially, they would have their lunch eaten by those looking for value.
Yes, which is why it's hovering around $500 instead of $0.
But the real question is why competing companies have P/E ratios despite demonstrably worse prospects--Microsoft, for example, has a P/E of almost 15 despite far worse prospects in mobile, lower profits, and a smaller cash reserve. Explain that.
Even a back-of-the-envelope look at AAPL's business shows there is something weird going on with the stock.
> Companies who still need high growth to justify their stock price (read: Apple)
Terrible example. Apple in fact has a very low P/E for this sector (it's 1/2 that of Google). Apple could have zero growth and remain highly profitable for years.
Their P/E ratio is 27. It’s below P/E ratio for SP500, which sits right now at 40, and includes tons of beyond ridiculous companies like Tesla, with P/E ratio over 1200.
There’s lots of wrong with Facebook, but calling their stock overpriced isn’t one of those things.
Because delusional people still didn't learn their lesson from the first bubble.
>Do you have any evidence of this
Their P/E is 112. That's the very definition of overvalued. The price of their stock makes the company worth far more than they earn. If you purchased facebook, it would take you 112 years to break even on that "investment" at their current earning rate.
> However with these internet companies, they usually do not turn a profit or if they do, their PE ratios usually lingers in from ~100 to 1000. And the market considers that normal behavior now.
That's not normal, it's pure stupid. So if you don't think there are people sitting on the sidelines watching idiots bid up shares way, way beyond the replacement value of companies, you're not watching the same thing happen that others are.
Do people even understand what these numbers mean? It means after expenses, assuming no future growth, that's how many years it would take to make back your investment.
Do you know why a P/E ratio of 15 was historically considered high? Because even with modest growth, no one wants to wait 15 years for corporate revenues and acquisition costs to break even. News flash, 15 to 25 years isn't normal.
The average company doesn't even make it 15 to 25 years these days.
> Investing in the company already valued the highest in the market (AAPL) seems odd from the old version of BRK that I thought I understood.
Just because Apple has the highest market cap does not mean it’s overvalued. I added AAPL at $125 and $127 in early January because I thought the market was undervaluing Apple, just like Berkshire. Today it’s trading at $151/share.
This is why I hate Seeking Alpha: they can stretch a factual sentence ("Google is overpriced, given their P/E of X, because a fair P/E is Y.") into a whole article -- with fewer actual facts. I like how, for illustration, they (almost!) told us Google's past growth rate. That to defend the statement that "Although this exponentially growing income is really unprecedented it is a huge mistake to assume it can continue."
Thanks. Everyone I know who owns Google stock also thinks their growth rate will be exactly has high in the future as it was in the past. We all expect GOOG's market share to hit 47291% in a decade.
Their earnings are going up faster than their price. If investors think Google's growth rate is this high permanently, why has the stock's P/E dropped about 70% from peak?
"It is my contention not that Google is necessarily overvalued, but only that investors in the stock at these levels, if they think it is not overvalued, must realize what they are conjecturing as to the company's growth."
Thanks. So it might be expensive. And it might not. And investors should keep that in mind. Yes, that's what he's saying: investors should be aware that buying Google is not necessarily as safe as just keeping their money in cash.
"Let us think about what the current implicit future growth rate suggests about the dominance of this company in our economy. Within ten years, Google will be earning as much or more than over half of the Dow 30 components."
He doesn't defend this math, so I have no idea where he gets that idea. I have little trouble believing it, if true: Google already earns more than some Dow components ($4 billion for the last 12 months; Alcoa has around half that). But I don't see why Google must achieve this growth to be worth its current price: as long as investors continue to expect steady above-average growth, Google will have a long-term P/E higher than most.
"Where such capital can be deployed in the virtual world in which Google operates is not readily apparent to me."
Oh, good! Google operates in a 'virtual world'! Clearly they buy their servers for Linden Dollars and Flooz.
Full disclosure: I agree with the author's conclusion that Google is probably overpriced. But I've thought so since it was at $150.
> First off, the 86T figure is the yearly GDP of the world whereas the 2T figure for Apple is the value they are worth to shareholders in perpetuity. Not directly comparable.
This is a good point, the market price for the shares corresponds to cumulative flows of expected net profits accrued over many future years. To add more detail, when I do a crude discounted cash flow valuation of AAPL assuming very optimistic revenue growth (+15%) in the short term that decays to 2% growth after 5 years or so, & using a discount rate of 6%, that backs out a value per share estimate of around $134 , with the majority of that valuation -- $76 out of $134 -- being contributed from net profits that occur after a 15 year time horizon. The current market price for each share incorporates the assumption that AAPL will continue to be a profitable business for decades, maintaining comparable profit margins, with at least some degree of revenue growth that outperforms economic growth in the short run.
If we assume AAPL is afflicted by some weird calamity that causes it to have exactly 0 net profit over the next 12 months but then otherwise bounce back to its usual profitability, that should only reduce the valuation of each share by about $4 -- a 3% drop in share price .
Similar kinds of reasoning can be used to estimate how much the valuation of shares should drop due to COVID-induced short term loss in revenue & profitability -- e.g. it might roughly be something like a single-digit percentage drop in value -- say 6% ish -- (industry and company specific, some sectors such as hospitality and travel suffer more impact, and companies with heavy financial or operational leverage may have much higher short term losses in response to the same drop in revenue, perhaps going bankrupt). Compare to the 33% drop in market prices in march earlier this year.
My discounted cash flow valuation for AAPL assuming a pessimistic revenue growth scenario is around $70 / share -- so I value each AAPL share somewhere in the range of $70 -- $134 & won't be buying any while the market price sits at the high end of that range.
"And the market is saying that they think Microsoft is walking off of a cliff. That's why they are worth a P/E of about 13, while Google is worth one of 22 and Apple is worth one of 21."
Isn't low P/E a good thing? I don't see how this supports your point, unless I'm misunderstanding something.
> One interesting thing to note from that chart is their Beta (a measure of link to market volatility) is less than 1, which is very low for a high tech stock.
Not really, Looking at my Bloomberg terminal shows that AAPL US Equity has a beta of .944, YHOO US Equity has a beta of .748 and GOGO US Equity has a beta of .894.
It only takes a minute to go to a finance site and look up the PE for AAPL and see that this is utter nonsense. The PE is 16. Amazon has a PE of 97.
Disney has a PE of ~16. Do you think they have "very high growth expectations priced into the stock" too?
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