A company's stock price reflects investors' collective view of how much money that company will make in the years ahead. Generally speaking, when it trades at a high price-to-earnings ratio, investors expect rapid profit growth.
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Conversely, when a company trades at a low P/E ratio, it often means that investors don't expect that company to enjoy rapid earnings growth.
Apple (NASDAQ: AAPL), which is arguably the world's most successful technology company, currently trades at about 15 times expected fiscal year 2018 earnings.
By comparison, tech giants Alphabet and Microsoft trade at roughly 32 times and 25 times projected earnings for the coming year.
Given that Apple is currently in the midst of what is likely to be an iPhone "super cycle," during which the company is likely to see a surge in its iPhone revenue and profits, it might be surprising to see the stock trading so cheaply.
Here's why I think investors aren't yet willing to pay a higher multiple for the shares.
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Analysts expect profit growth to flatline
Website 4-Traders publishes an up-to-date table of the average estimates of Apple's future financial performance. Per that table, analysts expect Apple to deliver substantial revenue and profit growth during fiscal year 2018.
Revenue is expected to surge from $229.23 billion in FY 2017 to a whopping $274.23 billion in FY 2018, which ends in September 2018. Operating profit and net income are expected to surge to $74.8 billion and $57.2 billion, respectively, from the $61.34 billion and $48.35 billion that Apple took in during fiscal year 2017.
That's a lot of profit growth, and if Apple hits those numbers in the current fiscal year, it'll enjoy record revenue, record operating profit, and record net income. Those figures, amplified by the company's aggressive stock repurchase activity, should easily translate into record earnings per share.
Unfortunately, analysts expect Apple's operating profit growth to slow to a snail's pace after the current fiscal year. Analysts predict operating profit to be about $75.2 billion in fiscal year 2019 (up less than a single percent) and $78.65 billion in fiscal year 2020, up less than 5% from fiscal 2019.
I don't have access to each analyst's research, but I suspect that analysts are cautious about the potential for iPhone growth after the super cycle that Apple is likely to enjoy during fiscal year 2018. I wouldn't even be surprised to see some analysts modeling year-over-year iPhone revenue declines during Apple's fiscal year 2019.
At the end of the day, investors often rely on consensus analyst estimates in trying to figure out how much revenue and profit growth a company is ultimately expected to deliver, so stock prices often reflect heavily those analyst expectations.
The opportunity for investors
I think that at this point, a bet on Apple stock is a bet that the current iPhone product cycle won't represent close to peak iPhone revenue. Apple's other businesses -- iPad, Mac, Apple Watch, and even its services -- aren't large enough to allow Apple to deliver growth even in the face of flat-to-down iPhone sales.
For Apple to deliver robust revenue and profit growth, it needs to continue to grow its iPhone business.
So, if you're a potential Apple investor, here's how you might want to think about a potential investment in the shares. If you're convinced that its iPhone business will have room to run during fiscal years 2019, 2020, and even beyond, and if you're ultimately proven right, then Apple shares could go higher -- potentially much higher -- from here as Apple's financial performance outpaces analyst (and therefore investor) expectations.
But if you agree with the idea that iPhone is set to flatline (or even decline) after this year and you're looking for share price appreciation, you might be better off putting your hard-earned investment dollars elsewhere.
My sense is that the analysts are too pessimistic. While this year's iPhone X should help drive iPhone revenue up quite substantially, I think the introduction of a larger version of the iPhone X next year as well as a lower-cost LCD iPhone with a large, full-face display will help Apple deliver its strongest iPhone lineup ever.
I can't help but think that Apple's iPhone growth momentum will persist through the following iPhone cycle as well.
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