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Apple Looks Pretty Expensive Here

Jun. 01, 2020 2:56 PM ETApple Inc. (AAPL)AMZN, META, GOOG, GOOGL, MSFT225 Comments


  • Apple is my largest position, by far.
  • However, after poor bottom-line performance, I don't think the recent rally is justified.
  • I'm not selling my shares, but I believe that AAPL is roughly 28% overvalued.
  • This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Get started today »

As many of you know, Apple (NASDAQ:AAPL) is my largest position, by a long shot. In my portfolio, a "full" position carries a weight of roughly 2%. The vast majority of my positions are smaller than this. I own a handful of overweight names in the 3-5% weighting range. However, Apple stands head and shoulders above the rest of my portfolio with its current overall weighting of 12.9%.

As I write this, the S&P 500 is down roughly 7.2% year-to-date whereas Apple shares are up roughly 7%. Furthermore, the S&P 500 is currently down approximately 11.4% from all-time highs set back in late February while Apple shares are only down roughly 4% from their all-time high mark. In short, Apple has outperformed the market in 2019, in 2020, and throughout the COVID-19 environment. It seems as though this stock is an unstoppable force at this point in time.

Personally, I couldn't be more thankful due to my own very large stake in the company. However, putting aside my personal position and my long-term bullish stance with regard to the company, I feel compelled to voice the opinion that it appears as though AAPL's share price has become disconnected from its fundamentals and therefore, in the short-term, at least, this stock appears to be rather expensive.

I don't say this with a mind to sell/trim my position. At this point, I've essentially become resigned to maintain a heavily overweight Apple weighting because every time I consider trimming and think about potential replacements, I cannot find another company that I'd rather own.

And, while I am confident enough to say that I think the stock appears to be expensive, I also acknowledge the fact that the market is oftentimes irrational (sometimes, for very long periods of time) and with that in mind, I have no desire to attempt

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This article was written by

Nicholas Ward profile picture

Nicholas Ward is a Senior Investment Analyst with Wide Moat Research and the former editor-in-chief and portfolio manager at The Intelligent Dividend Investor, The Dividend Growth Club, and The Income Minded Millennial.

Nicholas is a contributor to the investing group The Dividend Kings where he shares analysis on dividend growth stocks. The Dividend Kings is a group of analysts, led by Dividend Sensei, that teach members how to invest more wisely in dividend stocks. The focus is on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn More.

Analyst’s Disclosure: I am/we are long AAPL, AMZN, FB, GOOGL, MSFT. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (225)

Eugene Capital Advisors profile picture
Nice article, well written. However, I think Apple's current PE of ~25X is more than fair at this point in time. Their multiple expansion YOY is not just solely due to the tremendous growth currently being generated by services/wearable, but it also reflects the fact that we are nearing the release of the 5G cycle.

Most existing Apple consumers who have not upgraded to the latest models, main driver of decreasing iPhone sales, will either be forced to upgrade or will want to upgrade to iPhone 12. Customers who purchased the latest model iPhone will still upgrade. And if the 12 is a 'game changer' which I think it will be, that will be a catalyst driving Android customers to switch over from the dark side and buy Apple.

This is a win-win-win situation, some of which is already baked into Apple's stock price and is reflected in the 25X multiple. But ultimately I think the impact of 5G will greatly exceed expectations and in tandem with services and wearables continued growth, advances in services due to 5G, as well as the 5G impact on Apple's healthcare platform, 30-35X will be the new norm once these drivers are in place.
Illuminati Investments profile picture
I love all those things too, which is why I'm still long AAPL, but how do you get a multiple of only 25x? 2021 earnings?

They would have to NOT decline this year among the coronavirus recession and then grow an additional 20% next year, which is a stretch.
Nicholas Ward profile picture
I certainly hope you're right about a 30-35x multiple...that will mean significant gains for me. However, I don't think that AAPL will be able to generate the type of growth to sustain such a multiple. IMO, a company would need to be generating 20%+ top and bottom-line growth, regularly, to sustain such a high multiple...this is unlikely to happen here.
While the word trim is often on my mind, it's got nothing to do with Apple. Sad for those of you who associate trim with Apple.
Nicholas Ward profile picture
Yeah, I'm content to simply buy and hold AAPL shares at this point.
Nicholas Ward - Apple is by far my largest position as well. I disagree that Apple's fair value is bet 18-20 PE.
Don't buy into the historical hysterical detractors who want to make us believe that Apple's PE should be less than MSFT/GOOGLE and in line with Clorox.
A consumer brand name like Apple, that is beloved for many years without hiccup, that has such a wide ecosystem and moat, on the cutting edge of technology with some of the brightest minds on the planet at the helm, working on new ideas and revenue streams yesterday today and tomorrow..with many more future new opportunities for revenue streams and ecosystem extension..........should not be valued at 18-20 PE.
Illuminati Investments profile picture
Did AAPL sales go up 50% during the pandemic like said bleachmaker CLX?

BTW, I'm long both, but think an 18-20x P/E is more reasonable for both, so I'm probably going to sell a bit of both.
Nicholas Ward profile picture
Yeah, I simply don't see the growth prospects here to justify a premium much higher than 20x.
Nicholas Ward - "Yeah, I simply don't see the growth prospects here to justify a premium much higher than 20x."

There are many companies that also don't have the type of growth prospects you refer to, but trade above 20x. Which means that if anyone should be trading above 20x without crazy growth prospects as per today's predictions, it should be Apple b/c of all the other things going for this company.

Also, PE is not simply based on growth prospects. PE has been going up for Apple not b/c growth is accelerating per se, but mostly b/c more and more people are coming around to value the company at a more fair value. Not sure what the current PE should be, but I believe it should be closer to 30+, then to 20 or even 25.
Illuminati Investments profile picture
Whoo-hoo, 30x possibly declining earnings! Party like it's 1999 or maybe 2099 when growth might return!
Nicholas Ward profile picture
Yeah - it is a bit concerning, to say the least. But, the balance sheet remains strong and the shareholder returns continue to roll in - I'll focus on that, I suppose.
I think all points here are valid- if you are a recent investor. I’ve been long on Apple since 1987 with thousands of shares. So regardless of where it goes from here I’m still in the drivers seat -
Nicholas Ward profile picture
Yeah - I have no desire to sell even though my cost basis is much, much lower than the current share price. So long as dividends continue to grow, I'll be enjoying this ride.
Another well thought out & well written Article Nicholas, Ty. In March I had some buy orders placed, @ $200, that did not got filled. My AAPL position is a huge % of my portfolio, @ $200, I would have happily > that %. I agree with you, at $331, AAPL is a hold. But I am not selling, I'll just DRIP, wait & watch....
jess perkins profile picture
@me66 - AAPL is 50% of my portfolio. Are you nervous? I am when we have a day like in Dec. 2018.
Nicholas Ward profile picture
Yeah, I'm in hold mode as well. $200 would have been very attractive, for sure.
Nicholas Ward profile picture
Wow, @jess perkins you're a brave investor with such high single stock exposure. I certainly wouldn't be able to sleep well at night so exposed to just one name, but I guess if I had to pick someone to be that heavy into, it would be AAPL.
Thank you but everyone knows the current US Stock market is overvalued and does not follow the fundamentals. Value investing is gone, we have to find the growth.
Nicholas Ward profile picture
"Value investing is gone, we have to find the growth."

I'm not so sure that value investing is dead overall...just ignored at the moment.
Diesel profile picture
It's been ignored for the last 3-4 years easily if not longer.
@Nicholas Ward, yes value is ignored, but there are some values and I myself try to blend both styles.... It isn't just one or the other, for me.
thebucketshop profile picture
The market is realizing that this is a company with a growing moat. Some investor said the equivalent of: The "real estate" of the iPhone screen is better than 5th Avenue. Because of a large customer base with high retention, it is only a matter of time before services (such as payments) really move the needle.
Nicholas Ward profile picture
Agreed - services are still growing nicely. However, I suspect it will be another 5-10 years before they represent the majority of AAPL's sales.
Agree. Sold today at $324. Love the company, but given its so reliable on the consumer really concerns me. Outside of multiple expansion (fed put), I think risk outweighs reward at this price.
Capt Jack Daniels profile picture
100% of the time AAPL stock goes up when they introduce a new phone? guess what AAPL has introduced its new phone and they have another one on its way.

100% chance AAPL goes higher from here.
Ta0 profile picture
There was a dip yesterday. If you had bought it back, you'd have made another gain today.
Capt Jack Daniels profile picture
If you gave AAPL the same PE ratio as say a mundane bleach manufacturer? AAPL would be trading well above 400 a share so really AAPL is still cheap.
Nicholas Ward profile picture
I don't think it's a great idea to evaluate stocks like that...it's akin to the old statement: two wrongs don't make a right. Just because CPG companies are overvalued doesn't mean that I'm willing to pay a overvalued premium for AAPL as well (even though it's lower on a relative basis). Either way, I'm not locking in any margin of safety, IMHO, anyway.
As an old foggie I see young investors buying Tesla , just because, musk said it was overvalued, goes down one day right back up the next. Apple is the same especially with millennials today, but, just because. Millennials buying ford? Chevy?
Sometimes you just go on, just because
Nicholas Ward profile picture
Well, for what it's worth, Ford and Chevy don't have very attractive growth outlooks, nor very attractive shareholder return metrics, so I can def. see the benefits of focusing on AAPL here.
Eric Bradley profile picture
I closed out my September $290 calls for a nice gain today. Also sold some of my shares. I just sold the equivalent number of contracts for June $305 puts. Will generate some cash and see if market takes a breather and assigns them to me.

FAANG has been struggling at this level. Will see if I can lower my cost basis and get a net increase in share count. Sometimes this works, sometimes I’m regretful.

Joel Irwin profile picture
Agree, I recently sold a portion of mine to lock in some of the massive gains I had.
Looking to reenter on a dip
Nicholas Ward profile picture
Good luck! I'm not all that interesting in attempting to time up a top/dip situation, but I certainly hope you're able to make the trade you hope for!
We went heavily short AAPL today. Long-term target: $120.
Nicholas Ward profile picture
Wow, I certainly wouldn't short this name. Good luck, but that seems like a dangerous trade to me.
craftbrewinfo profile picture
@Nicholas Ward agreed.. I don't think we will ever see that level... $200', yes, $100's, don't think so...

Who is 'we'?
jess perkins profile picture
@Nicholas Ward -"Apple is my largest position by far". Apple is also my largest position, by far. I'm thinking it should be in everyone's portfolio. Hugely successful company, and hopefully a bright future with the prospects of 5G.
Nicholas Ward profile picture
Yeah, it's such an easy stock to buy and hold that I'm not sure that I'd disagree with you. There are certainly other high quality names that offer strong growth prospects, but none of them also offer the same shareholder returns as AAPL.
I’m thinking of trimming because it is now 22% of one of my accounts and 21% of one of my retirement accounts. Thinking of trimming it down to 15%. But there always seems to be a reason to wait like the 5g cycle so I never end up trimming. Plus I’m not sure I have any other stocks where I want to put the proceeds right now. Guess I’m suffering from Apple paralysis.
Nicholas Ward profile picture
Yeah - I've trimmed AAPL twice in the past because of my weighting and both times, I ended up regretting it. I won't make that mistake a 3rd time.
Ta0 profile picture
@Nicholas Ward
Thanks for that honest comment. I appreciate that.
Nicholas Ward profile picture
Those are the only kind I leave :)
us44ever profile picture
I think the best decision is to trim as it’s way over allocated in your portfolio. Then relocate to other existing or future opportunities this year and be in cash now... I’ve personally trimmed from 5% to 3.5% but kept Amazon @ 5% as I think it hovers over a fair value based on cash flow... I have a cap of 5% max per stock in my portfolio.. good luck...
Nicholas Ward profile picture
Thanks for the comment. I've trimmed AAPL a couple of times in the past due to overweight issues and I ultimately regretted it each time. With that in mind, I've become content to simply hold this large position until the dividend growth stops.
Diversification = making sure you have some crappy stocks in your portfolio along with the good ones.

Trimming Apple for what? What a joke.
glssmrbl profile picture
Hahahaha. At some point with recruiting new stocks to the portfolio this is inevitable. Once the quality dries up you gotta look down a level in quality to keep adding new positions. I like my 9-12 stock portfolio.
Loophole69 profile picture
Yea, that is what they said when I bought Apple at $71...... and about every ten dollar increase to where it is now. I still own it and I am up 348%.
Nicholas Ward profile picture
I'm not sure who "they" were - for years, I thought AAPL was undervalued (which is why I accumulated such a large position). However, now...at 25x earnings, that's not the case.
I agree. Had I listened to any of these Apple wet noodles over the past 10 years I'd be out a half million bucks.
Ta0 profile picture
Likewise, but I didn't wise up until it hit $99. Then I backed up the truck, and it's now my largest holding. Been dripping it constantly, and still have all the shares I have ever purchased. Never gonna sell this baby.
LazyGringo profile picture
AAPL deserves an equal or higher PE than MSFT and a higher PE than GOOGL. GOOGL is now 10% higher than AAPL and MSFT has a 30% higher PE than AAPL which makes no sense as AAPL is the superior company with the brightest most secure future. AAPL has weathered the Covid 19 storms quite surprisingly well, and is about to swell its paid user base substantially all around the world. Plus AAPL has committed another 100 billion to buybacks and since the company itself is the ultimate insider buyer, take confidence in that. If Apple management had any doubt that their future was very bright they would use the 100 billion for something else. Buybacks are the ultimate proof of self confidence. I fully expect AAPL to be over $400 in the not too distant future and do not believe the loud mouthed anti China talk will have much of an affect on the company. Gross margins light shrink a bit but the whole pie is growing, and one thing most people miss is that Apple owns the #1 most valuable piece of property on earth, and that is called IOS. They own it and any time they want to they can make extra money from it.
Nicholas Ward profile picture
I'm not so sure that AAPL deserves a higher multiple than MSFT and GOOGL because of its exposure to hardware. Historically, hardware has demanded a lower multiple and I don't think that's going to change anytime soon. With that said, I certainly hope you're right about AAPL rising above the $400 mark...long and strong AAPL.
Nicholas Ward - while true that Apple is mostly a hardware company, few things are worth noting:
1. The typical 'rules' re: hardware have not applied to them for 10+ years and it would be wrong to assume that will change.
2. Their services business is growing strongly, and many don't understand that besides all the services we already see on our radar in terms of profits, there are some that are yet to give ample fruit but surely will in time: Apple Pay and Credit card, Apple becoming a Media powerhouse which is inevitable, and health related applications and forays.
3. The ecosystem, and resultant moat, of the company is something the world has never seen... and its only growing...and that alone should give it a much higher multiple than 20.
Nicholas Ward profile picture
I just don't think the company's value should be weighted so heavily towards the software side of the business until that side of the business represents a larger portion of the sales pie.
Selling subscriptions
Illuminati Investments profile picture
Services up 17% to $13.3B.
Nicholas Ward profile picture
I love AAPL's services bizz, but ~$50b is still a rather small piece of the pie with regard to its overall revenue pie (how amazing is that?)
TK8500 profile picture
Uhhhhh... ya!!!

AAPL was ridiculous at $325 in January when we were entering the perfect storm of services booming coupled with the super cycle.

Now at $325 it’s just flat out stupid.

Dan Ives $400 price target. What a loser!!! Hahaha
Nicholas Ward profile picture
It's hard to justify the price when earnings growth is flat (that's my humble opinion, anyway).
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