Tuesday, July 26, 2011

Apple’s P/E Ratio

Apple’s earnings report last week blew everyone away. Revenue grew 82% year over year and profits jumped 125%. Apple’s stock price reacted accordingly (for once) and has shot up 5.84% since the day it reported earnings. But because Apple’s bottom line grew 20 times faster than its stock price has, Apple’s P/E ratio has actually shrunk. At close yesterday it was 15.55. As I write this it stands at 15.97.

Netflix reported its earnings yesterday. Profits and revenue grew 55% and 52% year over year, respectively. Its $1.26 earnings per share beat the street’s consensus of $1.11 by 13.51%, but NFLX is currently down 8.09% because of its third quarter outlook. Its P/E ratio is 75.53.

If a company’s P/E ratio is supposed to be indicative of its growth prospects, then why is Netflix’s P/E ratio more than 4.5 times higher than Apple’s when Apple is growing its bottom line more than twice as fast as Netflix is? And why does Amazon, who is expected to report a 42.62% year over year increase in revenue later today, have a P/E ratio that is more than 5 times Apple’s when Apple’s top line is growing nearly twice as fast?

Because Apple doesn’t give a shit about Wall Street, and that’s not something Wall Street is used to.