Throughout the extraordinary surge in Apple Inc. (AAPL)’s share price, a persistent question has lingered: Why is the stock still so cheap? One overlooked answer may be that Apple’s accounting isn’t as conservative as it used to be.
After topping $500 a share this week, the iPhone and iPad maker now has a $468 billion market capitalization. Yet Apple trades for only 14.3 times its earnings for the previous four quarters — about the same as the Standard & Poor’s 500 Index’s price-earnings ratio — in spite of growth that’s far above average. Revenue last quarter rose 73 percent to $46.3 billion, while earnings more than doubled to $13.1 billion.
Many theories have been floated for why such a rapidly expanding company with such loyal customers would trade for so little. Perhaps investors believe Apple will cling to its $97.6 billion hoard of cash and marketable securities, rather than pay a fat dividend. Others have suggested a lack of confidence about the future. It’s a consumer-electronics company, after all, and competition is brutal.
While each of those points has merit, here’s an explanation that hasn’t gotten enough attention: Thanks to an accounting- rule change for which it lobbied, Apple gets to book revenue from sales of bundled products such as iPhones — which include hardware, software, services and upgrade rights — more quickly than it used to. In short, one reason Apple’s earnings have been so high is accounting inflation, and the market realizes this.
Restated Numbers
The easiest way to see the rule change’s impact is to look back at the two sets of numbers Apple reported for fiscal 2009. Originally, the company said it had $5.7 billion of net income for the year on $36.5 billion of revenue. Then in January 2010 Apple retroactively adopted the new accounting principles and restated its previous numbers. The restatement boosted Apple’s fiscal 2009 net income 44 percent to $8.2 billion. Revenue was revised to $42.9 billion, 17 percent higher than originally reported.
Nothing changed economically, of course. Only the accounting did. On the surface, though, Apple’s valuation looked cheaper under the new reporting regime than under the old one.
On Dec. 31, 2009, for instance, Apple had a market capitalization of about $191 billion. Using the fiscal 2009 earnings that Apple initially reported, its price-earnings ratio that day was about 33. Using its restated numbers, the ratio would have been about 23. My guess is a similar effect is occurring today: Had it not been for the rule change, Apple’s P/E ratio would be higher, because the “E” would be lower.
Source: Bloomberg | Jonathan Weil
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