On the last day of 2019, Apple (AAPL) stock shut off one year of explosive growth and another main metric reached a high at the historic level also. Trailing price-to-earnings (P/E), ratio progressively escalated this year along with its stock price. According to FactSet, Apple started the year with a previous P/E ratio just above thirteen, less than its five-year average of 16.2, before ending 2019 at 24.7, its peak point since 2010. The trailing ratio of P/E is the price per single share of a stock divided overall earnings per share during the last twelve months.
Investors usually use it as a shorthand metric to find how expensive a stock is; however it is not perfect, as it doesn’t account for debt and cash and based on previous performance else than future expectations. The forward-looking P/E of the company that measures price/share divided by projected earnings during the next twelve months is 21.8, that is also expensive in the history of the company. An increase in the P/E ratio of the company could mean that investors expect growth of earnings in the future, so they might keen to pay more now. Though, it might also be a sign of threat that the stock overvalued.
Apple’s Stellar year sent its P/E ratio soaring
Price-to-earnings ratio (last twelve months) since the beginning of 2019
Apple basically had a less ratio of P/E as compared to its mega-cap technology peers. When the P/E ratio of Apple was about ten in 2016, venture capitalist Marc Andreessen tweet that, since deleted, that stock of Apple trades like a steel mill on its way out of business. Whereas the present figure is remarkably high for Apple, still it’s under the average for the S&P 500 IT index, that consists of seventy companies, but excludes internet firms including Alphabet, Netflix, Amazon and Facebook. According to FactSet, the average ratio of P/E in that index is now twenty-six, above from twenty, at the start of the year.
Jeriel Ong, the analyst of Deutsche Bank, said that several factors drove up the P/E ratio of Apple this year, including a general market drift and bearish expectations about Apple earlier this year. Ong said that investors demonstrated iPhones as a continuously falling business but sentiment improved, and now, he expects growth year-over-year. Not only iPhone 11 did improvement about expectations, but investors also started to look ahead to the iPhone 5G 2020 cycle, that expected to be a super cycle. Wearable devices of Apple also performed well, he added.
2019 Closing P/E ratio of major tech giants
Back in 2012, Apple started to trade at a discount to the S&P 500 with the P/E multiple reducing to 10-12x at that point S&P 500 was 12-13x; thus the idea that it might now trade at a point 3-4x premium to the S&P 500 at 18.5x is exciting indeed. The P/E ratio of Apple still ranks among the lowest as compared with the other mega tech stocks. Amazon is closing out the with a P/E of 81.8, Facebook with 32.8, Microsoft with 29.7 and Alphabet, the Google-parent firm ending up with 28.7.