Is Apple Stock Overvalued? | The motley madman

AppleThe share price of has risen nearly 60% this year and has doubled in the past 12 months. At $ 2.16 trillion, the company’s market cap is the largest of the US stock exchanges; and until a recent pullback, stocks repeatedly hit all-time 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 other two biggest companies, other tech giants. Amazon and Microsoft, both of which are worth around $ 1.7 trillion.

Is Apple’s great race the result of overly exuberant investors who pushed it too high? Or can this tech giant continue to grow bigger and continue to produce shattering 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:

Dated

P / E ratio

P / S ratio

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 = price / sales; P / FCF = price / free cash flow.

These numbers show that investors have become much more bullish about Apple over the past year. A year ago, a selling dollar 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 counterparts in the largest tech companies? Here is a preview.

Data source: YCharts. Valuation change over one year until the stock market closes on October 9.

While Apple’s valuation has grown rapidly, it remains lower than its peers. One of the reasons is that Amazon and Microsoft have higher growth rates. Amazon is expected to increase its 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 has accounted for about two-thirds of the company’s total revenue. If iPhone sales did not increase, investors wondered how Apple would develop?

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

First of all, there is optimism that iPhone sales could increase. 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 inspire 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. It happened, and in the quarter ended in June, the company set a revenue record. 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 usage of services like Apple Music and the App Store, that will fuel growth.

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

These two segments have a much more significant impact on revenues. In 2016, they accounted for just 16% of Apple’s revenue. In the first nine months of fiscal 2020, they produced $ 62 billion, representing 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 who take opposing positions: the buyers and the sellers.

For investors who focus on traditional valuation metrics, Apple probably looks scary. It hasn’t had such high valuations for 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 made it possible to build a massive and loyal customer base, which is why Forbes The magazine ranks Apple year after year as the most valued brand in the world.

With this track record of innovation and customer retention, I don’t think Apple is overrated. Historically, there is never been a bad time buy Apple shares, as long as you own those shares. 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. .

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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About Catherine Sturm

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