Is Apple Stock Overvalued? | The motley madman


AppleThe stock price is up almost 60% this year, and it has doubled in the past 12 months. At $ 2.16 trillion, the company’s market capitalization is the largest of the US stock exchanges; and until a recent pullback, stocks repeatedly hit historic highs.

These data points could scare some investors. After all, the business was already huge. Now its market capitalization is about $ 400 billion more than the next two biggest companies, fellow tech giants Amazone and Microsoft, both of which are around $ 1.7 trillion.

Is Apple’s great race the result of overly exuberant investors who made it soar too high? Or can this tech giant continue to get bigger and keep making smashing returns in the market?

Apple unveiled its Apple Watch Series 6 in September. Image source: Apple.

Valuation has increased – a lot

Here’s a look at some of Apple’s top valuation metrics and how they compare to a year ago:

Date The ratio P / E Rapport P / S P / FCF ratio
October 2020 35,7 7,6 29,0
October 2019 19,2 4.1 17,9

Data source: YCharts. Data until market close on October 9. P / E = price / earnings; P / S = selling price; P / FCF = price / free cash flow.

These numbers show that investors have become much more optimistic about Apple over the past year. A year ago, a dollar in sales was valued at $ 4.10 in the share price. Today that dollar is valued at $ 7.60. The same has happened with the company’s profits and free cash flow. Simply put, Apple’s stock price has grown much faster than its earnings, sales, and free cash flow.

How do these metrics compare to those of its largest tech companies? Here is a preview.

Data source: YCharts. One-year change in valuation until the market closes on October 9.

While Apple’s valuation has increased rapidly, it remains lower than that of its peers. One of the reasons is that Amazon and Microsoft have higher growth rates. Amazon is expected to increase adjusted earnings per share by 38% this year, and Microsoft just ended its fiscal year with 21% year-over-year growth. By comparison, Apple is expected to grow 9% in fiscal 2020, which ended in September.

Reasons for investor optimism

In recent years, Apple’s iPhone sales growth has stalled, and the device accounted for about two-thirds of the company’s total revenue. If iPhone sales did not increase, investors wondered, how would Apple develop?

This skepticism was reflected in the relatively low valuation of the company. In May 2016, when legendary investor Warren Buffett started raising Apple shares for Berkshire HathawayApple’s P / E ratio was only around 11. It has since tripled, and much of that expansion came last year. I think there are two main reasons why investors have changed their view of the business.

First, there is the optimism that iPhone sales could be boosted. On October 13, Apple is expected to announce that its iPhones released this fall will support 5G connectivity, a technology that could dramatically improve download speeds. This update could prompt many iPhone users – and there are around a billion of them – to switch to a new phone.

Second, Apple has diversified its revenue streams. In early 2017, CEO Tim Cook said he wanted the company to double its service revenue by 2020. This happened and in the quarter ended in June, the company set a revenue record of services ($ 13.2 billion). Apple has an installed user base of over 1.5 billion devices, and if it can get those customers to increase their use of services like Apple Music and the App Store, that will fuel growth.

The company has also grown its wearable, home and accessories segment, which includes products such as AirPods, Apple Watch, and Beats. When Apple releases annual results on October 29, it will have more than doubled segment revenue in just three years.

These two segments have a much more significant impact on revenues. In 2016, they only accounted for 16% of Apple’s revenue. In the first nine months of fiscal 2020, they produced $ 62 billion, or 30% of total revenue. Even with this growth, the iPhone still accounts for more than half of the company’s revenue.

Is Apple overvalued?

Evaluation is in the eye of the beholder. This means that the question of whether Apple is overvalued can only be answered by each investor. After all, the market is built on people taking opposite sides of trades: buyers and sellers.

For investors who focus on traditional valuation metrics, Apple probably looks scary. He hasn’t had such high ratings in over 10 years.

For investors who see Apple as one of the most innovative companies of all time, the outlook might be different. The company’s innovation has helped build a massive and loyal customer base, which is why Forbes The magazine ranks Apple as the most valuable brand in the world year after year.

With this track record of innovation and customer retention, I don’t think Apple is overvalued. Historically, there has never been a bad time to buy Apple stocks, as long as you own those stocks. As a $ 2.16 trillion company, Apple’s biggest growth days are behind it, but I believe it can continue to provide long-term investors with above-market returns for years to come.


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