$AAPL is acting irrationally compared to almost all other equities

I listened to Fast Money yesterday and there was yet another talking head, whose primary expert qualification was that she called the Enron debacle (BACK IN 2000!). She was implying, without out-right saying, that the target price should be $200 based on her analysis. Her main premise is that transitions from a ‘growth tech stock’ to a value tech stock’ is a messy affair. To the credit of Karen Finerman, she buttoned up the conversation by saying that AAPL has never been valued as a growth stock. Finerman is correct, of course, and a valuation now that is bordering on single digits is certainly not a growth stock valuation. Nevermind that the PEG ratio is closing in on 0.5.

Here’s my rant on this stock: depending on whether or not AAPL is rising or falling analysts and talking heads will proffer the argument that AAPL is either just like other companies or that AAPL is special and different than other companies. That’s ok, but the bottom line is that it can’t be both! This is a binary type of distinction, like being pregnant or not.

Either way, no matter what your answer is,  the stock price is behaving irrationally. Lets take one side and say that AAPL is just like other companies. Lets compare it to two older tech stocks, MSFT and CSCO. I’ve chosen these two as AAPL is actually a blend of the two. CSCO primarily makes hardware that changes substantially with time (why I chose CSCO over INTC whose product is fast becoming a commodity) and MSFT primarly makes software with a few exceptions. Now let’s compare the P/E ratio using 12 month trailing earnings and PEG ratio using 5 year projections. Right now for P/E AAPL is trading at 10.37, CSCO at 13.67 and MSFT at 14.94. Their PEG ratios (which compares valuation to growth rate) are as follows: AAPL 0.75, CSCO 1.63, MSFT 1.83. Here’s the irrationality in this scenario – the PEG ratios are assuming that AAPL will not grow at all, anymore. In fact it assumes that it will contract, much like RIMM. But lets say that AAPL is like these old tech stalwarts and should trade with a similar P/E. Then if valued like CSCO, AAPL should be trading at 601.48, and if trading like MSFT then we should be seeing a share price of 657.36. But today, AAPL is trading at 456 instead.

What’s the other side of the argument? That AAPL is special, that its not like other companies, it is innovative and forward thinking, like say NFLX? Here the market is even more irrational. NFLX is trading at a PE of 636 and has a PEG of 33.91! Want to see what the company would be worth at this type of valuation? $27,984 a share! Yes, one share!

Well the answer to the question is obvious, the market is irrational. Therefore trading is a little like trying to predict what a crazy-assed schizophrenic will do at any given situation. I think I already knew that, but until you look at the numbers you don’t realize just how crazy it can be . . .