Think Apple stock is expensive? History says otherwise.

[Chart courtesy of GigaOM.com; click on it for a larger version]

Om Malik over at GigaOM.com has a fascinating analysis of Apple stock performance over the past five years. Despite the fact that Apple stock is hitting all-time highs lately, it's price-to-earnings (P/E) ratio over the years has actually been going down steadily over that time. Historically, its trailing P/E is 38, while its forward P/E is 30. Compare that with the beginning of 2003 when Apple's P/E was a whopping 300, and suddenly $125 a share doesn't look so bad. And in fact, if I divide $125 by the last 12 months of earnings, I get a value of ... 38.4. What if I compare with my projections for the coming 12 months of earnings? I get a P/E of 30.4.

The interesting data point here is that these are historical averages. They were created during a time when Apple was challenging conventional wisdom by selling legal digital music [commentary at the time was that no one could compete against free Napster], selling iPod music players [analysts repeatedly claimed that Microsoft's DRM licensing business model and market power would surely crush it], and shifting its computers to Intel processors [which commenters said would make Apple computers commodities and therefore substantially reduce its margins]. In short, investing in Apple stock was perceived as "risky" and "doomed". And only in the last six months has the news business and the market realized that Apple might, just might, have a shot at reinventing yet another business outside computers and music: the cellphone business.

The bottom line: Based upon its price to earnings ratio, Apple stock currently trades around its historical averages. Given how much the company has grown and developed over the past five years, those historical averages don't properly represent its growth potential and value. The big question is, what should the new P/E benchmark be? Vote below, and I'll pass on the final results.

Technorati Tags: Apple, Finance, Financial analysis, Om Malik, P/E, GigaOM.com