Apple: Path To $250 And Below

Mar. 06, 2020 10:20 AM ETApple Inc. (AAPL)107 Comments

14.93K Followers

Summary

Technically, Apple's stock price should drop another 15% to achieve the balanced state.
In terms of analysis of internal growth, Apple is overrated.
Apple is overvalued according to such fundamental multiples like P/BV and EV/IC.

The stock market is best associated with a pendulum. It's rarely balanced, but inevitably comes back to the balanced state from time to time.

It is very likely that the beginning of the COVID-19 epidemic determined the point at which the "market pendulum" changed its direction of movement. So, it's time to remind once again where Apple's (NASDAQ:AAPL) balanced price is.

1. Technical parameters

In the long run, Apple stock price, like any other growing public company's stock price, follows its long-term exponential trend. This trend acts as a specific average:

Now, the company's stock price is still above this trend by almost one standard deviation. All things being equal, technically, the stock price should drop another 15% to achieve the balanced state.

2. Growth drivers

First of all, let's look at how the market capitalization of Apple responds to the growth of its absolute financial indicators. There are some interesting patterns here.

Over the last 10 years, Apple's capitalization has been in a qualitative linear relationship with its revenue:

And here we must note two things. Over the past two years, the absolute size of the company's revenue has not grown much and the gross margin has even decreased:

At the same time, Apple's market capitalization grew by more than 50% only in 2019... And even if we take the analysts’ average expectations as a basis, within the bounds of the mentioned model, the company’s balanced price per share in Q4 2020 will be around $220, which is still lower than its current value.

Considering the long-term relationship between the EPS TTM absolute size and the company's capitalization, Apple's current price is also overvalued and should decrease by 20% to achieve the balanced state:

Let's move on and look at how the growth of Apple's financial indicators relate to the current level of its multiples.

Let's start with EPS and P/E growth rates. In Q1 2020, the three-year CAGR EPS TTM diluted amounted to 14.79% - this is far from the best Apple result in the last ten years. And at the same time, the current P/E multiple is almost the highest since the year 2010. This is an apparent inconsistency indicating the reassessment of the company.

The situation with FCF is approximately the same:

As we can see, in the context of the proposed models, the market has been chronically overestimating Apple in the last year.

3. Comparable valuation

In this section, I would like to offer a comparable valuation of Apple through historical-priced and forward-priced multiples. I will show only time-tested models.

First of all, let's consider the P/E (forward) multiple adjusted by the expected annual growth rates of earnings. It turns out that in this case, the implied price of Apple is actually very close to the actual price:

But, from November to February, the implied price was above the level of the actual price and then dropped below its level. This means that in the context of current forecasts regarding earnings growth rates, Apple is not undervalued relative to the main blue chips in Nasdaq.

Another interesting result we get analyzing the EV/EBITDA multiple. In this case, the implied price is also close to the actual price:

But now let's do something not quite ordinary and look at the more specific EV/Book Value multiple:

In this case, we get that Apple is highly overvalued. But the most important thing in this case is that, until recently, this multiple was a good indicator of the company's balanced value. The same is true for the EV/IC multiple:

So, we can state that Apple is balanced according to the P/E to growth (forward) multiple. But Apple is overvalued according to such fundamental multiples like P/BV and EV/IC, and this is not to be ignored.

Bottom line

The COVID-19 epidemic is relatively not very deadly, but it spreads fear. And this fear does not depend on the level of the interest rate in the U.S.

We must agree that for the residents of China, South Korea and Italy, the importance of buying a new smartphone has significantly decreased. And who knows in what other country the epidemic will be announced. All this is a very negative background for Apple, and for the stock market as a whole. But in the case of Apple, the situation is further complicated by the fact that the company is already significantly overvalued by the market.

Under such conditions, I believe Apple's stock price will drop below $250 in the near future.

This article was written by

Oleh Kombaiev

14.93K Followers

Individual investor, data and financial analyst. I am interested in investment decisions based on objective methods of modeling and statistical analysis. Besides, I pay much attention to the psychological aspects of decision making.

Analyst’s 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.

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