Is Apple (NASDAQ: AAPL) stock overvalued? // Motley Fool Australia

Is Apple (NASDAQ: AAPL) stock overvalued? // Motley Fool Australia
Is Apple (NASDAQ: AAPL) stock overvalued? // Motley Fool Australia

This article was originally published on All prices are in US dollars unless otherwise stated.

Apple Inc.The share price (NASDAQ: AAPL) is up nearly 60% this year and has doubled in the past 12 months. At $ 2.16 trillion, the company’s market capitalization is the largest on the US stock exchanges. and until a recent pullback, stocks hit repeated all-time highs.

These data points may put some investors off. After all, the company was huge. Now the market cap is around $ 400 billion more than the next two largest companies, the tech giants, Inc. (NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT), which are both around $ 1.7 trillion.

Is Apple’s great success the result of overly luxuriant investors who have overpowered it? Or can this tech giant get bigger and bigger and continue to generate market-breaking returns?

The rating has risen – a lot

Here’s a look at some of Apple’s top valuation metrics and how they compared to a year ago:

date P / E ratio P / S ratio P / FCF ratio
October 2020 35.7 7.6 29.0
October 2019 19.2 4.1 17.9

Data source: YCharts. Market close data on October 9th. P / E = price / earnings ratio; P / S = price-performance ratio; P / FCF = price-to-free cash flow.

These numbers show that investors have become much more optimistic about Apple over the past year. A year ago, one dollar in sales was valued at $ 4.10 in stock price. Today that dollar is valued at $ 7.60. The same applies to the company’s earnings and free cash flow. Simply put, Apple’s stock price has risen much faster than its profits, sales, and free cash flow.

How do these metrics compare to your biggest colleagues in technology companies? Here is a look.

Companies P / E ratio P / S ratio P / FCF ratio, Inc. 126,5 5.2 61.8
Microsoft Corporation 37.5 11.6 36.7
Apple Inc. 35.7 7.6 29.0

Data source: YCharts. Annual valuation change until October 9th close of trading

While Apple’s rating has risen rapidly, it remains lower than its peers. One reason for this is that Amazon and Microsoft have higher growth rates. Amazon is projected to grow adjusted earnings per share by 38% this year, and Microsoft just closed its fiscal year with year-over-year growth of 21%. By comparison, Apple is projected to grow 9% in fiscal 2020, which ended in September.

Reasons for investor optimism

In recent years, Apple’s iPhone sales growth has stalled, and the device accounted for about two-thirds of the company’s total sales. If iPhone sales didn’t grow, investors wondered, how would Apple grow?

This skepticism was reflected in the company’s relatively low valuation. In May 2016, when legendary investor Warren Buffett started buying Apple stock Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) Apple’s P / E was only about 11. It has tripled since then, and much of that expansion happened in the last year. I believe there are two main reasons investors have changed their view of the company.

First, there’s optimism that iPhone sales could get a boost. On October 13th, Apple is expected to announce that its iPhones, released this fall, will support 5G connectivity, a technology that could improve download speeds significantly. This update could lead a lot of iPhone users – and there are roughly a billion of them – to update to a new phone.

Second, Apple has diversified its revenue streams. In early 2017, CEO Tim Cook said he wanted the company to double its service revenue by 2020. It did, and for the quarter that ended in June, the company set a record for service revenue ($ 13.2 billion). Apple has an installed user base of more than 1.5 billion devices. If these customers have more access to services like Apple Music and the App Store, this will fuel growth.

The company has also expanded its wearables, home, and accessories segment, which includes products like AirPods, Apple Watch, and Beats. If Apple reports an annual profit on October 29, sales in the segment have more than doubled in just three years.

These two segments have a much greater impact on sales. In 2016, they made up only 16% of Apple’s sales. In the first nine months of fiscal 2020, they produced $ 62 billion, which is 30% of total sales. Despite that growth, the iPhone still accounts for more than half of the company’s sales.

Is Apple Overrated?

The evaluation is in the eye of the beholder. That said, the question of whether Apple is overvalued can only be answered by any investor. After all, the market is built on people who represent different sides of the trade: buyers and sellers.

Apple likely looks scary to investors who emphasize traditional valuation metrics. It hasn’t had such high ratings in over 10 years.

For investors who consider Apple to be one of the most innovative companies of all time, the perspective might be different. The company’s innovation has helped build a massive and loyal customer base, which is why Forbes Year after year, the magazine rates Apple as the most valuable brand in the world.

With this track record of innovation and loyalty, I don’t think Apple is overrated. In the past, there has never been a bad time to buy Apple stock while you owned those stocks. As a $ 2.16 trillion company, it has Apple’s biggest days of growth behind it, but I think it can offer long-term investors long-term returns over the years.

This article was originally published on All prices are in US dollars unless otherwise stated.

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Returns from October 6, 2020

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