A few days ago Apple announced record quarterly earnings that beat almost all analyst expectations. The stock price has since fallen 5%, of course.

Whatever. You shouldn’t care about this, and don’t try to make sense of it. You’ll end up reading things like:

“They beat expectations, but not by enough.”

You’ll convince yourself this makes sense until your eight-year-old daughter asks you:

“How can everyone expect them to beat expectations? Wouldn’t that just be the expectation?”

She’ll understand when she’s older.

What you should care about — what you should always care about — is valuation. How much does a share of a company cost? How much does each share earn? And how much do those earnings have to grow in the future in order to justify the current price?

These may seem like obvious questions, but when it comes to Apple, nobody seems to care about the answers. The overwhelming consensus in the investment community is that if Apple doesn’t continue to grow at its current supercharged rate than the stock price will tank like it did two years ago. If you subscribe to this thesis, it MUST follow that the current stock price has enormous future earnings growth already priced into it. Otherwise, why would the stock go down so much when the growth slows down?

So how much future growth is priced into the stock? One way to look at valuation is to compare the total value of a company versus how much cash it produces each year after all its expenses. This can be measured by looking at the ratio of enterprise value / operating income. The lower the ratio, the lower the valuation.

As one analyst recently pointed out, Apple’s ratio under this measure is 11.5. He compares this to the values at Starbucks (32), and Sherwin Williams (33).

You’re probably not a financial analyst, so I’ll translate his conclusion for you. When he looked at total company value versus how much money each company makes, Apple’s valuation was three times cheaper than a paint company. A FUCKING PAINT COMPANY.

What the hell is going on?

Well, a higher multiple implies faster future growth. All things equal, an investor might pay more for a company, even if it earned less this year, if they believe those earnings will greatly increase going forward. So at current valuations, the market is telling us that Starbucks and Sherwin Fucking Williams are going to grow significantly faster than Apple.

Really? Does Starbucks have a master plan to make their coffee less shitty? Has Sherman Williams developed a smart paint that can adjust the temperature in the room?

I’m kidding (kind of). I don’t follow those companies closely and it’s very possible they will experience significant earnings growth. But Apple trades at such an enormous discount, and at such a low multiple, that the market is implying the following:

Apple is not only going to stop growing very soon- it is going to start shrinking, and 15 years from now it will be completely irrelevant and probably bankrupt.

Is this possible? Sure — but this isn’t a “worst case scenario” that is priced in at an extremely low probability. This is the MARKET CONSENSUS future for Apple given its current valuation.

Doesn’t this seem…off? Apple is currently growing at an annual rate of about 40%, double that in emerging markets. They produce the world’s single most sought after consumer product. They control their own operating system — ensuring their hardware can never be commoditized. Their ecosystem gets stronger as it grows in users. They have a 7-year history of customers upgrading in droves to their newest products. They currently have only 11% global smartphone market share, leaving enormous room for growth. They continue to control more aspects of their supply chain. Their customers are so loyal it is literally a joke. They are venturing into new product categories in both the short (watches, TV) and long term (automobiles, power, 100's of other secret projects). Oh, and they are sitting on $200 billion in cash and are in the middle of the largest share buyback in the history of corporate America.

Does this sound like a company that is on its last gasps of growth and innovation and is mere months away from the beginning of a precipitous decline?

Whenever I discuss Apple’s puzzling valuation with other investors, I’m met with one of three responses.

1) “You’re just a stupid fanboy”

Okay Galaxy S3/Surface Pro 2 owner who spends his time trolling investment message boards while listening to Taylor Swift, John Mayer, and Taylor Swift songs about John Mayer. Guilty as charged. I do love Apple, and that is why I buy a new iPhone every year, even before my contract is up.

It is NOT why I own Apple stock, however. I don’t make investment decisions based on things I love, otherwise all my money would be invested in ice cream sandwiches. I invest in Apple because the stock price is completely dislocated from reality.

2) “How could everyone be so wrong about this company? The market has to know something that you don’t know.”

I graduated college in 2005 and started trading bonds at an investment management firm. One of my very first mentors was a big believer in the wisdom of the market. “What is Mr. Market telling you?” he would ask.

Naturally, I pictured Mr. Market to be a wise old man with decades of experience, sitting in a rocking chair espousing sage investment advice to anyone who took the chance to sit for a few minutes and listen.

As I got more of my own experience, and then I lived through the financial crisis, I came to the realization that Mr. Market is not a wise old man. He is an irrational, schizophrenic, drug addict standing on the street corner screaming incoherent obscenities to random passersbys.

It’s hard to believe that the biggest and most analyzed stock in the entire market could be so wildly underpriced and poorly understood, but it is.

3) That’s an interesting analysis Brian, I think I’m going to buy a few shares.

Thanks Mom.