- 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.
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.
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