Apple: Not Exactly A Bargain Yet
Summary
- Apple is still expensive despite a $20 dip in the stock price.
- The company is forecast to resume growth below the 10% rate starting in FY22.
- Investors appear willing to assign far too much value to hyped products such as the Apple Car.
- Investors should avoid Apple above $125.
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Apple (NASDAQ:AAPL) fell more than $20 from the all-time highs reached back in January, but the stock isn't exactly a bargain down here at $126. The whole tech sector reached such stretched valuations that recent dips don't even bring the stocks back into value territory. My investment thesis remains more Neutral on Apple due to limited prospects for the fast growth needed to justify the current stock price.
Image Source: Apple website
Back To Normal
Throughout all of FY21, Apple will go through a period of reporting accelerated growth due to easy COVID-19 comps and the 5G iPhone upgrade cycle. Some of the extra growth is due to COVID-19 pushing out demand from the March quarter last year or shutdowns delaying production of the iPhone 12 until the December quarter and missing FY20 sales. A big portion of the growth is due to the elevated revenues from the new cycle due to 5G that won't repeat in FY22.
What ultimately matters is that growth will normalize back below a 10% annual clip in FY22. If anything, the elevated stock price reduces the terminal EPS growth rates as stock buybacks don't go as far and Apple no longer has the excessive net cash sitting at only $84 billion now. At a $2 trillion market cap, the net cash can only repurchase 4% of the outstanding shares.
Source: Seeking Alpha earnings estimates page
Due to the December quarter last year being boosted by iPhone 12 sales, analysts forecast the accelerated growth rates ending in the September quarter this year. In essence, the start of FY22 is now forecasted to coincide with slightly lower earnings followed by normalized earnings growth set to remain below 10% going forward. The stock still trades at 22x FY25 EPS estimates despite the limited growth forecast after this fiscal year.
While the market likes to talk about strong growth trends for Apple whether via Services or new product hype, the analyst community doesn't actually see the growth materializing.
Apple Car Hype
The only real way to justify the current valuation is to assume a large valuation for future products not even close to starting production now. The major area of hype is the all-electric, Apple Car forecast for production in 2024 at the earliest and maybe 2028 to be realistic.
UBS analyst David Vogt assigned a whopping $14 per share price target for the Apple Car. The analyst is assigning a $235 billion valuation to a product that isn't even in production and the tech giant hasn't even found a partner yet to produce the cars for a company that doesn't typically get involved in manufacturing. Possible auto manufacturers such as Hyundai (OTCPK:HYMLF) and Kia (OTCPK:KIMTF) don't appear still in talks with Apple.
Tesla (TSLA) is a world class EV manufacturer and the stock just last year passed a $250 billion market cap. The company was generating $25 billion in sales at the time and is on pace to $48 billion in sales this year and over $60 billion next year.
UBS is assigning a valuation to the Apple Car similar to the most valued company in the sector after years of developing and producing market-leading vehicles. Apple hasn't shown any sign the company can produce something outside of the tech space and Tesla will have another three to five years of production lead to extend their dominance in the space.
Without the car hype, even UBS only has the stock worth $128 after the price hike. Currently, Apple trades for $126 providing limited upside without assigning massive amounts of valuation to the car segment.
In a podcast interview, CEO Tim Cook wouldn't even confirm the company plans to make a car. He did call autonomy a "core technology" suggesting Apple plans to invest in the space and figure out a way to provide the integration of software into the AVs of the future. The tech giant is clearly investing in LIDAR technology to develop the tools for AVs considering this award for a lidar patent.
The market assigning such a large valuation to a potential product is where the valuation doesn't make sense. The auto space already is crowded with companies making vehicles now and so far companies such as Hyundai and Kia appear unwilling to partner with Apple in manufacturing vehicles designed by the tech giant.
Takeaway
The key investor takeaway is that Apple is far too expensive here despite the recent dip in the stock. Anybody assigning a material value to the hyped Apple Car is taking on excessive risk that is unwarranted. Investors should tread carefully with the stock back above $125.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I am/we are long AAPL. 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.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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 (112)
I'll quote Peter Lynch:
"Once you have built the story for your company, you have a powerful tool for judging the stock. But like any powerful instrument, you must use it wisely and carefully or you will get burned. Use your story to pick the right time to buy a stock. I promise you that the right time to buy a stock does not occur often. When I am following a stock, buying opportunities present themselves once or twice a year if I am lucky. I look for times when the potential upside is high and the potential downside is reduced. Understanding that balance is a key to successful stock investing."I hear ya'll think: " What Risk!? The right time is now because Apple's stock will rise forever!"
But hold on for a second.Business fundamentals and stock prices are not correlated together because if it was, then every stock should trade at fair value. I'll quote Howard Marks next:
“There are three stages to a bull market:
the first, when a few forward-looking people begin to believe things will get better,
the second, when most investors realize improvement is actually underway, and
the third, when everyone concludes that things can only get better forever.”“It’s not what you buy. It’s when you buy it, under what conditions and at what prices.”We are currently in the third and I'll tell you why.Most posts I read about Apple are always optimistic which is good but I read too that you should keep buying Apple at the current price of $134 because ya'll think it's going up forever.
When I look at the P/E ratio of the S&P500, uh-boy, it's over 40!
And last but not least, since everybody is so optimistic about the future, many people are leveraged again just like in the past. Which drives stock prices up until the bubble burst.
Is a correction bound to happen?
Yes, maybe, I don't know and I don't care.
People who read Howard Marks books know what I'm talking about.Apple has a long-term P/E ratio of 13.54 since it started making money. Long-term eps growth rates dropped from 20% (10year), 7% (5year), and 12% (3year). This equals 13% average growth, kind of the same as the p/e. So, at the current price, Apple's current p/e is currently 34.54. The only time Apple's stock p/e ratio was this high, was back in 2007/2008. After that, it has been trading most of the time between 10 and 20. Just like the S&P500.I'll quote Peter Lynch again:
"Watch out for ridiculously high prices when a company is selling at several times its growth rate and earnings."Give the author a little bit of respect here. He's only saying that the current stock valuation is way too high, and honestly, he is just warning us just like all the famous investors did twenty or more years ago. So, I agree with him.
Is the business great? Yes, it is! But the stock isn't. And we still have plenty of time to hop on the boat enjoying this wonderful company for many years to come.Cheers!
In my opinion, Apple is overvalued but I could be wrong. The market is high because the sentiment of the investors is overly optimistic. So, people keep buying assets no matter the price of the asset. Which leads to overvaluation at some point. It's supply and demand. This is a basic concept you should know. Still, most stock prices post-Covid are not justified. Look at where they were trading pre-Covid and there is your answer. Will the stock prices revert back to pre-Covid levels? No, probably not, but there will be a correction whatsoever.
So if I understand you correctly, you believe the market as a whole is over valued and Apple specifically.In your opinion, is Apple a sell? If so why?In my opinion the market is high because world central banks and world governments have colluded to add $ into the system. As they say don’t fight the fed. At some point this will reverse. I don’t think the time is now.Thanks
to $100.
There are still macro economic reasons for the Apple stock to fall if you consider inflationary fears that are justified by being flush with cash. The 10 year bond is rising and value stocks and REITS are gaining favor over growth names like the FAANG group.
Sure hope you loaded up back in August on this negative hit piece... lol seekingalpha.com/...
In a podcast interview, CEO Tim Cook wouldn't even confirm the company plans to make a car. He did call autonomy a "core technology" suggesting Apple plans to invest in the space and figure out a way to provide the integration of software into the AVs of the future.
<<As if Apple regularly comments on products that do not exist..You want to say the stock is fully priced. Fine. The simple fact is the street has forecast about 6% gdp growth. Bonds are coming back and cyclicals are in favor over tech.These are macro trends having nothing to do with AAPL.
You talked nothing about valuation and that is a major problem.
Anybody that has bought $AAPL at nearly 30x forward earnings and held hasn't seen very good returns.
What sector doesn't have any competition? They don't dominate any market other maybe smart watches.
Technically, the ecosystem is only around 10% of the global smartphone users. Those numbers are factored into the growth rate. Katy Huberty cut the price target despite the Services growth rate.
Yes, anybody justifying the valuation based on a product that won't hit the market for at least 3-4 years is trying to hard. Where were these people a decade ago when the stock was being given away?
Can understand that concept considering $AAPL was a holding for over a decade, but one should take advantage of market opportunities. How long are you ok with holding the stock without making any return?