When the tech market cries ‘unfair’, look behind the numbers

Share prices are the barometer of market sentiment about companies, but when investors complain that the market is being “unfair”, one needs to look beneath the numbers. That’s one argument where in Research in Motion(RIM), Apple and Microsoft would agree.

When the share price of RIM recently reached a new seven-year-low, dipping below $17 for the first time since 2004, it represented not only a massive 75% fall from its high for 2010, but also a 30% drop from the day after the end of the October BlackBerry outage — when its share price seemed to stabilise at around $24.

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In the immediate aftermath of the outage, it may have seemed that the company had survived its customers’ distress. But investors quickly showed they had not forgiven management — neither for the outage nor its failure to respond to its ongoing outage in addressing the smartphone and app challenge in a meaningful way.

Investors are voting for change at the stock market coalface.

The joint CEOs are no doubt still blustering about how unfair the market is: after all, at a market capitalisation of $9.01-billion, the market prices it well below the value of its assets: around $9.9-billion. But investors know that asset value today only reflects the most recently released results. When the next set of quarterly results is announced next week, there may well be blood on the floor in Warerloo, Ontario, RIM’s hometown.

Ironically, at the other end of the success barometer, Apple investors are also whining about how unfair the market is. While they are not complaining too much about a share price of $390 — almost double its price at the beginning of last year — those who bought at its $426 high in mid-October are a little nervous.

But the number that makes them most nervous — and reaching for the same label of “unfair” we hear at RIM — is not the share price. It’s the price/earnings ratio, which shows the multiple of the share price over the current annual profits declared by the company. In effect, it shows the number of years it will take for current profit levels to pay back the price of the share. The higher the ratio, the more it indicates investors’ expectation that profits will accelerate and deliver a quicker pay back.

For Apple, that multiple is 14.1, which is not bad in its own right. However, as Jay Yarrow shows in Business Insider, it hardly sets Apple apart from its hi-tech peers.

Quite the contrary. Not only has it plunged from a PE ratio of 32.1 at the beginning of last year, but it is also so far behind Amazon’s 100 (already up from the 96.1 mark flagged by Yarrow), that the barometer of market sentiment is clearly telling us something other than market share and current profits.

It’s not about Steve Jobs either: the trend was in place well before he was upgraded.

The hidden message in this code probably goes along the lines that the delay in releasing the iPhone 5 has probably dented profit prospects for the next few quarters, and that Amazon has struck a massive blow with the release of its Kindle Fire tablet at less than half the price of the cheapest iPad.

Amazon also traded at an all-time high share price ($246) in October, and is down even more than Apple, at $190, but with a PE ratio that continues to defy gravity.

What is probably most galling for Apple followers is that its PE ratio is only marginally above that of Microsoft — another company that is an “unfair” victim of market sentiment. Its share price has barely shifted in a decade, despite the company continuing to make a mockery of those who predict its doom year after year.

At a PE of 9.2, the market clearly doesn’t expect Microsoft to thrive, but nor will it go away. Because there’s another little number that market sentiment ignores: cash reserves.

Oh, it makes a big fuss about Apple’s reserves. Especially, for example, when it was revealed in July that Apple’s cash reserves of $76-billion had passed those of the US treasury (a paltry $73-billion).

But no one at the time mentioned its closest rival in this department. None other than Microsoft, with $55-billion in the bank. Compare that to Google’s $39-billion.

The CEOs of RIM, the fans of Apple and the investors in Microsoft all have one thing in common: they would agree that market sentiment is an uncaring, unthinking and ignorant bastard.

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