Financial Markets’ Deep Pessimism About Apple

Alexis Madrigal charts the decline in Apple’s share price since the release of the iPhone 5, which has been fairly substantial, “despite the fact that the iPhone 5 broke all previous Apple sales records, which gives you some kind of idea bout the tremendous expectations that Wall Street (and Main Street) have for Tim Cook’s company.”

That sounds right, but I don’t think the math really adds up. What’s really happening is that Wall Street’s expectations for Apple are quite bleak. The company’s PE ratio is 14.76 which is a teensy bit on the low side, but that $588.78 billion in market capitalization includes over $110 billion in cash. So if you exclude the value of the cash and just look at the valuation based on forward-looking earnings potential, what the markets are saying is that in the future Apple will grow quite a bit slower than the average American company. Not slower than the average high-tech hardware manufacturer, but slower than a typical company overall.

But that’s probably a misleading way of thinking about it. More likely, people have seen the lightning speed with which RIM and Nokia went from market leaders to basketcases and have decided that there’s far-above-average risk that the whole Apple franchise will see its value collapse out of nowhere. Each new product release is an opportunity to somehow put those fears to rest (but how?) and the iPhone 5 didn’t do that. Instead rumors of strikes in the Asian supply chain have reenforced the idea that there are a lot of hazy risks and Knightian uncertainty out there.