Tuesday 10 December 2019

Richard Curran: Apple shows market not all technology valuations are crazy

Apple didn’t disappoint when it came to hype, spectacle and glamour around the launch of its new iPhone 6 and iWatch.

They even had U2 launch a new album at the event which saw one for free for everyone in Apple’s 500m iTunes audience.

Customers will lap up the new products and the iPhone 6 is expected to sell around 120m units in the first 12 months. Apple doesn’t do small. Investors love to buy on the hype and sell on the facts. Apple is trying to prove that it is still an innovator of genuinely new products. It has to, because its competitors are selling cheaper products.

The only way to stay on top with higher prices and better profit margins is to keep delivering something new that is better that everybody else. Samsung doesn’t have come up with the best new phone in the world. It just has to come up with one that is as good but cheaper.

Apple Inc shares reached new all-time highs in recent weeks in the run-up to the launch. In the last week or so, its shares fell back a little to below $100 as investors took a profit. Yet at that price it is valued at $580bn. It is a real business with massive revenues and over $100bn of spare cash lying around the place.

It stands out from other tech giants as an innovator with real profits, as opposed to innovators with potential to make profits.

Smartphones compared: Reuters
Smartphones compared: Reuters

One of the oldest and best ways of valuing a business is to see how many years of profits would it take to reach the value placed on it by investors. Known as the price/earnings ratio, it shows what stocks are trading at valuations that are based far too much on future hope rather than expected profit.

Facebook share are up 40pc so far this year and the business is valued at over $200bn. This is 38 times it expected 2015 earnings. Yet this looks cheap compared to Twitter (148 times 2015 earnings), LinkedIn (83 times 2015 earnings or Netflix (75 times 2015 earnings).

Apple’s P/E is running at around 16 or 17. This makes it look cheap. That all depends on whether you believe it can keep innovating profitably. Tech companies with unproven revenue models are being snapped up by the likes of Facebook and others for billions of dollars. Technology valuations are not all crazy, just some of them. 

Online Editors

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