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Why Apple’s absurd valuation makes perfect sense

Apple CEO Tim Cook introduces the new Apple Watch on Tuesday, Sept. 9, 2014, in Cupertino, Calif. Apple's new wearable device marks the company's first major entry in a new product category since the iPad's debut in 2010. (AP Photo/Marcio Jose Sanchez)
AP Photo/Marcio Jose Sanchez
It’s a big thing.
By Matt Phillips
Published Last updated This article is more than 2 years old.

From one perspective, Apple’s valuation seems downright absurd. It’s fluttering above $670 billion today.

By market cap, Apple is the world’s most valuable company. Microsoft is running a not-so-close second, with a valuation of roughly $409 billion, after recently overtaking Exxon-Mobil.

With so much distance between the front-runner and everyone else, the Apple valuation seems pretty nuts. Then you look at the business. Recent quarters have shown that Apple can still generate impressive year-over-year growth despite the substantial baseline numbers. (For instance, revenue rose 12% to $42 billion during Apple’s September quarter.) And the company is predicting a giant Christmas season.

Those company revenue forecasts have driven quarterly profit expectations sharply higher. The average earnings projection on Wall Street jumped to more than $2.50 after Apple’s most recent quarterly report.

And those higher earnings expectations form a firm foundation for Apple’s recent stock price run-up.

At more than $115 apiece, Apple shares are up more than 40% this year, outpacing the 11% gain in the S&P 500. But they’re trading at only 15 times analysts’ earnings expectations for Apple over the next 12 months. This “forward price-to-earnings ratio” is a favorite investor gauge of valuation. A price-to-earnings multiple of 15 is typically considered “fairly valued.” Not a bargain. But not too expensive either.


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