Watching Apple's (AAPL) share price see-saw over the past three weeks -- up to $644, down to $555, up to $618, down to $581 -- investors might well wonder whether there's any limit to how high or, more to the point these days, how low the stock can go.
To set some guidelines, we asked Bullish Cross' Andy Zaky to freshen a pair of charts he posted last November for an article entitled Apple: The Most Undervalued Large-Cap Stock in America.
The bar graphs at right, updated to reflect the most recent quarterly report, contrast the exponential increase in Apple's earning with the steady decline in the value of its stock as measured by its trailing price-to-earnings ratio (P/E).
The top chart shows Apple's twelve month trailing (TTM) earnings roughly doubling year-over-year (from $20.98 in April 2011, for example, to $41.04 in April 2012).
The bottom chart shows its stock's value (its P/E, not to be confused with its stock price) falling from as high as 50.98 in Q4 2007 to as low as 12.62 in Q2 2012.
This is called "compression," and you hear Apple investors complaining about it all the time. They like to contrast Apple's P/E ratio to Amazon's (AMZN).
Apple's revenues grew nearly twice as fast as Amazon's last year. But Apple's stock is trading this week at less than 14.3 times earning. If it were trading, as Amazon does, at 190 times earnings, it would selling for more than $7,800 a share.
But comparing any stock with Amazon buys you nothing but heartache.
Zaky's point is that there seems to be a limit to how much Apple's P/E can be compressed. "In its recent history, it went to 12.6 only twice," he says. "During the financial crisis and now. And each time it led to a massive reevaluation."
