The tech world is abuzz today over the news that Apple has surpassed Microsoft as the largest technology company by market capitalization. Based on intraday trading, Apple now has a market cap of $227.1 billion versus Microsoft’s $226.3 billion. Even more alarmingly, Apple is now the second-most highly valued American company: Only Exxon-Mobil’s is higher, at $282 billion.
Now, market cap is a volatile thing, and Microsoft could easily surpass Apple once again based on the whims of the stock market. The bigger objection to using this as a gauge of Apple’s worth lies in the meaning of market capitalization itself, which is calculated by the number of shares of a company outstanding multiplied by the price per share. In a nutshell, this means it’s less a gauge of the intrinsic value of a company than of what people think it’s worth — or, in many cases, what people think other people think it’s worth. Is Apple really the most valuable technology company in America, then, or simply the most overhyped?
Let’s compare market cap to a metric that value investors like to use to roughly gauge a company’s long-term prospects: Its price/earnings ratio, which consists of the market value per share divided by the earnings per share. Apple currently has a P/E ratio of of 20.96, meaning investors are willing to pay $20.96 for $1 of Apple’s present earnings. Microsoft’s, on the other hand, is much lower: 12.93. Exxon’s is 13.49. The value investor Benjamin Graham, who counseled a conservative investing approach, considered any P/E higher than 15 or 16 to be “speculation” rather than true investing.
But that’s not all: Apple recently changed its accounting rules to “allow them to account for iPhone sales immediately rather than spread the effect over a 24-month subscription period.” If Apple had not made this change, its P/E ratio might be above 30, and thus even more speculative.
Higher P/E ratios, which are common in the tech world, aren’t necessarily bad: They just reflect greater faith that a company will continue to grow and deliver for the foreseeable future. But whose faith? A person or entity who’s buying stocks but not holding them forever, Warren Buffett-style, might buy Apple stock not because they think it’s the most valuable thing in the tech world, but because there are enough people who do that they can unload their stocks on someone who thinks it is in the near term and make a tidy profit.
Does all of this mean that Apple is experiencing a big valuation bubble? Not necessarily, but you’ve got to have a lot of faith that current trends will continue or that Apple will stay on top of what changes occur. With, to name but two examples, Android continuing to gain market share at the iPhone’s expense, and with all-you-can-eat streaming music services like MOG and Spotify challenging iTunes’ costlier a la carte model, that’s hardly a sure thing. Today’s hyped-up king of the hill could always wind up tomorrow’s second fiddle: Just look at Microsoft.
(title image via Little Coyote Arts)
