Apple: Valuation Update

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

The probable slowdown in Apple’s revenue and EPS growth is not inspiring.

Within the bounds of existing relationships, Apple’s rational capitalization is remaining 10% below the current level.

Proceeding from the current earnings forecasts, Apple is more expensive than the key blue-chips of Nasdaq.

There are some long-term relationships between the parameters of Apple’s (AAPL) financial performance and its market price. These relationships make it possible to determine the expected dynamics of Apple if its financial performance in the coming quarters is within analysts’ expectations.

Analysts' average expectations suggest that Apple's revenue in fiscal Q3 2019 will be $53.44 bn. In this case, revenue TTM will reach $256.87 bn, showing an increase of 1.33% YoY. If we consider another two quarters ahead in the same way, we will see a negative growth in Apple’s revenue TTM.

Since 2016, Apple's revenue TTM growth rate and the company's capitalization, reflected by the EV/revenue multiple, have been in direct relation. If we take the analysts’ average expectations as a basis, within the bounds of this model Apple’s balanced price per share in the next quarter will be $187 (which does not differ much from the current level), while in Q4 it will drop to $179:

There is also a stable (R2=0.84) relationship between the revenue's absolute size and Apple's capitalization:

Taking into account the fact that Apple’s absolute revenue in the coming quarters (judging by the analysts’ expectations) will not change considerably, Apple’s balanced capitalization will not change either within this model, remaining 10% lower than the current level.

Let's go on.

The analysts' average expectations suggest that Apple's earnings per share in the last quarter will be $2.10, which means that EPS TTM will be $11,66, showing an increase of 5.71% YoY.

In the case of Apple, there is also a direct relationship between the company’s earnings growth rate and the P/E multiple. Within this model, based on the average analysts’ expectations, Apple’s balanced share price in Q3 will not differ much from the current level, but in Q4, it will drop to $181.

In agreement with the model based on the relationship between the absolute EPS volume and Apple’s level of capitalization, the expected results for the coming quarters also indicate a slight decrease in the company’s balanced capitalization level:

And in conclusion I suggest comparing Apple with the Nasdaq key blue chips through the P/E to Growth (forward) multiple:

As you can see, in this case, the implied price is already considerably below the actual price. Such a discrepancy between the implied price and the actual price within the bounds of this comparison arose only a month ago.

Bottom Line

The next two quarters will be difficult for Apple, and there is nothing left to do but to hope that the active buyback will prevent the shares from falling into a new downward wave. But in any case, it is not worth hoping for the strong growth of the share price.

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.