Apple Inc. (AAPL)’s Is Overvalued Based On Price-To-Earnings Ratio

Apple Inc. (NASDAQ:AAPL) is expected to devote a major part of its media event, which is to be held tomorrow, to the announcement of its newest device, the iPhone 6. If rumors are to be believed, a wearable device from Apple, currently known as the iWatch, will also be announced tomorrow. At the eve of this revolutionary event, CNBC’s Melissa Lee discussed the core of the California based company’s valuation with Options Action trader and co-founder and editor of RiskReversal.com, Dan Nathan.

Nathan compared Apple Inc. (NASDAQ:AAPL)’s current performance to the numbers obtained during the financial year 2012 when the iPhone 5, its previous blockbuster offering, was released. Apple reported earnings of $6.31 in FY2012 and this year, the value is expected to be three cents higher at $6.34. Sales were also up to $180 billion from $156 billion, which is an increase of about 15% when compared to FY2012. Though people generally quote the higher price to earnings ratio, he was of the opinion that the decline in gross margin and net income must also be taken into consideration.

“[…] The company has bought back $55 billion in stock in the last two years […] that makes this number, the P/E number much higher, but […] with the gross margin decline and the net income going down, that is what you people should be looking for […],” he said.

Nathan remained skeptical about Apple Inc. (NASDAQ:AAPL)’s overvalued price-to-earnings ratio. He stated that they might have to make use of the $165 billion of cash in their balance sheet to continue to manage their earnings if the soon to be released iPhone 6 does not command the same popularity and sales as its predecessor.

“[…] If they flop on the iWatch and they flop on some of these service things and the iPhone 6 is just an OK release, […] they are going to have to actually really invest in R & D and that cash is going to be important,” he explained.

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