Apple Inc.: 2 Tables That Prove the Market Is Missing the Point

Stocks are lower on Wednesday, as traders react negatively to yesterday's post-close earnings report from the most valuable U.S. company, Apple (AAPL -2.41%).  The Dow Jones Industrial Average (^DJI -1.63%) and the broader S&P 500 (^GSPC -1.54%) are down 0.46% and 0.32%, respectively, at 1 p.m. EDT. The growth-oriented Nasdaq Composite was down 0.78%. If a martian were to land on Earth and go through the iPhone maker's latest set of results, they would be dumbfounded by the market's reaction, and I can't say I'd blame them. A few numbers is all it takes to see why. 

Apple: The market is missing the point
The stock market isn't a laboratory, not in the sense that you can set up controlled experiments to test hypotheses, at least. However, the market sometimes fortuitously offers up well-designed experiments that provide real insight into investors' behavior and biases. 

Today, we have one such opportunity in comparing the market's reaction to the quarterly results of Apple and Microsoft (MSFT -1.32%), both of which were released after yesterday's market close and pertain to the quarter ended June 30. The comparison is highly instructive and allows us, at a glance, to see the absurd expectations to which Apple is being held -- which is a source of opportunity for long-term investors. 

Before you object to the comparison, let me say that I realize the two companies are not perfect comparables (there really is no such thing for a company like Apple), but they are certainly close enough for our purposes. While there is relatively little overlap between the companies' businesses, both are nevertheless megacap companies in the technology sector, and thus vie for position in many institutional investors' portfolios. 

The following table shows today's stock market reaction to the two companies' results along with some of the key metrics relating to quarterly performance: 

*Relative to analysts' consensus forecast.  Source: Company documents, Bloomberg. 

In sum, while Apple surpassed Microsoft by a huge margin in terms of revenue and earnings growth, the market is treating shares of the former more harshly. (Apple's numbers, incidentally, are staggering: 33% year-on-year revenue growth for a company that size? Astounding.) 

This might have made sense if Apple's stock had been priced to perfection and trading at higher share price multiples than that of Microsoft, but the following table shows that simply isn't the case:       

The explanation found in the financial media for today's stock price decline is that investors are focusing on Apple's revenue guidance for the current quarter, which fell somewhat short of the consensus estimate and on unit sales of the iPhone, which were also below consensus. I can't see much else to explain it, but this seems to me to be missing the forest for the trees: forecasting quarterly results is a fool's errand, but Apple's long-term fundamentals and prospects remain excellent.