No. of Recommendations: 32
I don't think it makes sense to value Apple the same as a railroad. Based on what you wrote previously, Apple, at a current P/E of 33, is wildly "overvalued", because you claimed all P/E ratios must eventually fall to a more reasonable value of 15.
No, I never claimed any such thing.
I've never called it wildly overvalued. And I have never suggested a multiple of 15 for them.
Apple's normal market multiples of (smooth) earnings have generally falling the range 9 to 45 in the last decade. That's a pretty wide range.
Consequently, and quite reasonably, I don't think that using the current market value gives much of a clue to what it's actually worth, so I pick a constant multiple of cyclically adjusted earnings.
If your main interest is the rate of change of value over time as I am, rather than a specific level, then it doesn't actually matter much what multiple you use.
But for whatever it's worth, I usually use 21 times cyclically adjusted earnings for Apple. That's pretty arbitrary, but the specific number doesn't matter much.
The key thing is realizing that value rises quite closely with the trend of earning power, and is not particularly correlated with the market price.
After all, the price could fall by 70% tomorrow and the multiples would still be in the range seen in recent years, but a share wouldn't be worth any less.
Note, the 21 I usually use is for the purposes of tracking a conservative value metric through time. (historically that's pretty generous)
I would rather be pleasantly surprised than unpleasantly surprised.
The firm may well be worth more than that, but (as I have so frequently mentioned, verbatim) I am merely unwilling to ASSUME that is the case.
That is not even vaguely similar to suggesting that it's wildly overvalued, or that I think it's worth only 15 times earnings, neither of which have I ever said.
you wouldn't have touched AAPL back in September of 2018, when it's P/E ratio climbed to a lofty value of 18, thereby making it "overvalued" according to your measuring stick.
Not sure what you're smoking there...thinking about anther poster perhaps?
I think it's a better buy when it's relatively cheap (like my buy suggestion in 2013) than when it's relatively expensive, but that's true for everything.
As prices go up, the rewards on offer get smaller.
As mentioned, I've increased my estimate of the value of a share by about 80% in the last three years.
The reason is that the (smooth) earnings per share are up that much, so it seems like a pretty good guess for rock and roll purposes.
The market price might be up or down since then--it doesn't really matter much to me, since it contains so little information for someone trying to value them.
Because you don't know what future revenue streams these could bring, your P/E or "fixed multiple" analysis ... won't work with Apple.
Why not?
What, then...you think that each dollar of cyclically adjusted earning power at Apple is worth more and more each year because they are so wonderful? An ever expanding multiple of current earning power?
How do you arrive at that conclusion?
True, it's better to estimate the entire future trajectory of real earnings in detail, but that's pretty unknowable for mere mortals. We can guess how long it will last and at what levels, but only guess.
Without making those estimates in detail, which probably wouldn't improve accuracy at all, an adequate value proxy is much better than no value proxy. A fixed multiple of (smooth) earnings is good enough.
For so long as the the real earnings are going up, at a rate in the same sort of range, and for a comparable length of time into the future, the intrinsic value pretty much tracks a fixed multiple of the current current cyclically adjusted earning power.
The same is true for any company with a substantial barrier to competitive entry that it is reasonable to value using EPV. Different multiples for different firms with different future prospects, of course.
Jim
