Apple: Valuation Update

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About: Apple Inc. (AAPL)
by: Oleh Kombaiev
Summary

Technically, Apple's stock price is more or less balanced now.

For the first time in a long time, Apple’s capitalization does not critically exceed its balanced level in terms of internal growth.

Over the last 12 months, expectations of Apple’s EPS future growth have noticeably decreased. Such pessimism puts considerable pressure on Apple’s capitalization.

1. Technical parameters

I will traditionally start with the technical parameters of the stock price dynamics.

Apple’s (AAPL) stock price, like any other average public company's stock price, has been following its long-term exponential trend:

At the moment, the actual price of Apple’s stock deviates from this trend without exceeding the standard deviation. It means the company's stock price is growing in accordance with its natural trend:

The return analysis generally confirms the conclusions of the first part of the article:

So, technically, Apple's stock price is more or less balanced now.

2. Growth drivers

When it comes to talk about Apple’s valuation, I select four key dependencies which allow us to judge how balanced is the current capitalization of the company.

The first one is the long-term relationship between the revenue TTM absolute size and Apple’s capitalization:

This relationship identifies Apple’s current capitalization as slightly overvalued.

The second one is the relationship between the EPS TTM absolute size and the company's capitalization:

And here, we see that Apple's capitalization is close to the balanced state.

It's important to note, that if analysts’ average expectations concerning the revenue and EPS of Apple in Q1 2020 come true, the company’s balanced capitalization will approach $1 trln within the bounds of the proposed models. With a glance at the buyback program that Apple is carrying out, this means that the company’s balanced stock price will be approximately $220.

Judging by the company’s current revenue growth rate, Apple's EV/Revenue multiple looks balanced as well. Though it is worth noting that with due account taken of the fact that Apple’s revenue growth rate is slowing down, I think it would be normal to see this multiple somewhere at the level of 3.25, that is below the balanced level:

The same conclusion is true of the EV/EBITDA multiple. Taking into account the fact that Apple’s EBITDA shows negative growth rate, the balanced level of this multiple is about at the level of 10 for now:

So, within the bounds of the described relationships, Apple’s current capitalization is classified as slightly overvalued.

3. Comparable valuation

I see no point in making a comparative analysis of Apple on the bases of historical price multiples. If you adjust these multiples to the current growth rates of the company’s financial indicators, Apple will be the most expensive stock on NASDAQ. Instead, let’s talk about forward-price multiples.

This is what we get analyzing the P/S to growth (forward) multiple:

In this case, Apple is highly overvalued. But it doesn't look like the market is prone to evaluate Apple through this multiple. In other words, judging by the history of this indicator, for the market, it's okay to evaluate Apple like this:

Most interestingly, this is what we get after analyzing the P/E to growth (forward) multiple:

Based on this multiple, Apple is almost fairly priced by the market now.

Though I am a little confused by the fact that only one year ago, the assessment in this way indicated a highly undervalued state of Apple:

In other words, over the last 12 months, expectations of Apple’s EPS future growth have noticeably decreased as compared with other companies in my sample. In my opinion, such pessimism puts considerable pressure on Apple’s capitalization.

Bottom line

For the first time in a long time, I can conclude that Apple’s capitalization does not critically exceed its balanced level. At the same time, taking into account the fact that in the next two quarters, we are most likely to see a continuation of the decline in the company’s growth rate, I do not think that, in the near future, Apple shares will be capable of a significant increase.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.