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Apple: Not Exactly A Bargain Yet

Apr. 06, 2021 2:54 PM ETApple Inc. (AAPL)HYMLF, KIMTF, TSLA112 Comments


  • 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

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This article was written by

Stone Fox Capital profile picture

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.

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Comments (112)

RedOakMania profile picture
This one gave me a good laugh today. Thanks!
TopDog417 profile picture
I guess it will then never be a buy for you. Just keep waiting.
Mr. Cash Flow profile picture
Behind every stock is a business. When you believe the business is going to expand or do better five, then, or twenty years from now, you should buy the stock. But is this the smartest move?

We all know Apple is a must-have in every portfolio. It's a wonderful company with a great brand and a moat. But in the meantime, it's all about risk/reward and I think there is more risk than reward with the current stock's price of Apple.
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.

davel profile picture
@Mr. Cash Flow

If you believe what you say you should be dumping all stocks.

So the question is why is the mkt so high?
Mr. Cash Flow profile picture
@davel If I didn't believe a word of what I've said, I wouldn't have written it. And who is talking about dumping stocks? The only way I'd dump a stock is when its fundamentals change.
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.
davel profile picture
@Mr. Cash Flow

Thanks for the response.
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.

So, my question is this, how much higher does the stock need to climb before it drops a bit and the author thinks its a buy?🤨
dennisokin profile picture
Nice timing ! You guys are the new Michael Blair. Publish a negative hit piece on AAPLE and watch it go up 4 % within 5 days.

Thank you, when I saw your article i bought more. LMFAO
Hudson Investments profile picture
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.
Stone Fox Capital profile picture
Sure hope you loaded up back in August on this negative hit piece... lol

dennisokin profile picture
@Stone Fox Capital I have been long aapl with avg price of about 70 after splits for quite some time, thank you. also have made a fortune selling naked puts on this issue. If anyone followed your advice on this stock you have cost them a fortune. This stock is only 7.5 % off its all time high. i believe there is only about a 3 week period where someone could have paid more for the stock than it is worth today. Feel very comfortable with it, please keep talking stock keeps going up Michael ooops mean Stone Fox lmfao
davel profile picture
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.
Stone Fox Capital profile picture
6% GDP growth has nothing to with $AAPL. The reopen trade such as a travel will see a huge boost this year, not tech.
davel profile picture
@Stone Fox Capital

Yes, and the narrative is to switch out of tech to chase the rise in profits of other sectors.
Everyone is entitled to his/her opinion, that is what makes a market. It is a good thing you are long AAPL because I believe the stock performance over next 6-12 months will prove wrong your assertion that AAPL stock is too expensive here. With regard to the statement "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"......two comments: 1) IMO, there is very little assumption or discounting of an AAPL EV in the current price; and 2) at 25x FY21 earnings, AAPL is not expensive relative to the value and sustainability of its cash flow/FCF and also is not expensive relative to other quality consumer franchises such as SBUX, COST and DIS that all trade at mid-30s P/Es or higher on forward estimates. I think the general presumption floating around the AAPL bears on SA that earnings growth tails off later in 2021 and 2022 will prove incorrect because of 1) a booming economy driving higher disposable income and consumer spending, 2) growth in AAPL's services businesses, and 3) success of AAPL's new products.
So many catalysts ahead for $AAPL:

- 5G supercycle (this alone is reason to buy)
- Continued growth of services
- M1 rollout to full Mac product line (I will be first in line when the 16" MacBook Pro M1 is released)
- Commitment to be cash-neutral in the future
- iPhone expansion in India

Then there are the wildcards...not a reason to buy, but worth watching:

- Augmented reality device
- Virtual reality device
- Car (I give this very little chance of happening, btw)
- Plus who knows what else they are working on.....

As many have said, $AAPL is one to own, not trade. After an 81% rise in 2020, we were due for a pause.
@Molehead I agree. Always good to look at catalysts.
I would like to add also that we must look at the purchasing power of consumers.
I just read that despite their age, Gen Z , I’ve seen various stats on them holding between $34~$44 Billion in buying power alone and 82% of households agree that they have sway in buying decisions. And Guess which product they like as smartphones? AAPL They tend not to cling to Brands, but they do like AAPL.
Not to mention the athletes & generations aging and buying smart watches. People are hyper aware on being or becoming healthy, it makes a difference in outcomes; and we’ve seen it in this age of COVID.
I give them $$ maybe every 5 years, I give NFLX, AMZN, DIS, CMCSA, Pandora, GOOG $$ every month, XOM every week
@mr clark when you subscribe to those services within apple eco system, they get a hefty cut too :)
Service revenues expansion and I am expecting AR and eventually VR to drive future growth.

Compared to its peers of Microsoft and Google, valuation at a small discount. I am holding Apple and will add on any corrections or stock market crashes.
Illuminati Investments profile picture
Agree, it's way too profitable for this market...
RedOakMania profile picture
You are projecting (I believe) $5.68 EPS in FY25 ($125/22 PE).

There is a good chance Apple will do $5.00 EPS in FY22. I think you are under estimating the growth in the core business.

I have Apple conservatively hitting $6.50 in FY25, which would be a forward PE of 19 today. On cash flow basis, the multiple would be closer to 16.5. And, this assumes zero new product category launches (e.g. glasses, car).

If it kept its current PE of 34 (a very big if), the share price would be $220. That is where I expect Apple to be in FY25.

I don’t see how one can assume estimates aren’t low in FY22-23. Maybe even FY2021. They’re well known for sandbagging estimates. Under promise, over deliver. Please and thank you.
I think Apple is one of those sweetheart of stocks all investors either openly (or secretly) own. We're all secretly waiting for that next big innovation which often comes with little to no notice,,, Apple is one of those rare stocks I would rather be in than out.
Stone Fox Capital profile picture
You talked nothing about valuation and that is a major problem.
@Stone Fox Capital
sorry perhaps I didn't explain well in my comment. I agree with your analysis on valuation. I was merely trying to say there are a few companies, Apple being one of them, where a lot of investors wrongly or rightly, overlook the price tag based on valuation today in favour of future potential, which cannot easily be valued today. Apple was expensive when I bought and it's expensive today. I bought and am holding merely because I have a lot of faith in the management and on the innovation front.
Stone Fox Capital profile picture
Anybody that has bought $AAPL at nearly 30x forward earnings and held hasn't seen very good returns.
Stone Fox Capital profile picture
Says a lot when Katy cuts the price target.

-To reflect peer multiple compression on the firm's higher estimates, Morgan Stanley cuts Apple's (NASDAQ:AAPL) price target from $164 to $156 while maintaining an Overweight rating.
@Stone Fox Capital I wouldn’t rely on analyst track records to determine if a stock is a good buy or not. They’ll just adjust the targets later, much later. Didn’t we recently see $150 price targets on TSLA when the stock was over $700. Those guys are frequently behind the curve
150 by summer time, ~20% higher from April 6 close.
Elicc profile picture
@TinyMike I hope to see at least 5% growth to put my short
"c'mon man!" $150 by Labor Day... I I swear some y'all have no imagination...nada, zilch...expand your horizons,.... the only clue I have about aapl.?..no have no real competition and they're only going to make more and more money, take it to the bank, I am!
Stone Fox Capital profile picture
What sector doesn't have any competition? They don't dominate any market other maybe smart watches.
Stone Fox Capital profile picture
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.
In&Out profile picture
AAPL & BA are great Put targets. “I hate buying options”, I love borrowing option buyer’s money! With AAPL & BA I have sold some leaping Puts...all already far into the green!
Only 84 billion in net cash? That’s funny. What about the 64 billion in free cash per year?

What about new products other than the car? Like AR related products? That’s not built into the share price. It could be that Apple is cheap at $126
Stone Fox Capital profile picture
@Apple Eye
You realize $64B in FCF is very paltry for a $2T market cap?
GearDownBigShifter profile picture
@Stone Fox Capital you might wanna check your math. Apples price to fcf is great . Especially based on the fact that is it the most valuable company on the planet. Plus it has a wider moat than most stocks in the market and a die hard loyalty customer base.
@Stone Fox Capital compared to what? teslas p/e is 1100, my house is nice at 850k, at 34 million, not so much
Agreed. Apple is a hold for me. I am excited about Apple Watch and the M-series chips used in laptops & tablet but these are not enough to support a higher price than we have now. WD
@wdchil yepp. Whenever I hear Apple Car I know these are not the times to add, I just hold
Stone Fox Capital profile picture
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?
One of the few stocks I own, not trade.
Stone Fox Capital profile picture
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?
GearDownBigShifter profile picture
@Stone Fox Capital if you held Apple for over a decade depending on your buy in price you are up 900-1300% plus dividends. What exactly do you consider making returns 😂
@Daan1 right on daan1 a friend of mine owned 150k in apple at 190k he sold and bought a rental condo and a used Mercedes by 2013 it would have been worth 73 million. mic drop done. most profitable company in the world by far!!!!!!!!!!!!!!!!!!!!!
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