about 3 years ago • 4 mins
Back in September, I set out several reasons why Apple’s $2 trillion valuation looked unjustified: while sales growth and earnings estimates were faltering, the tech giant’s share price wasn’t. Since then, Apple’s announced a new slate of iPhones – and its shares have continued to rally.
With the company’s next quarterly earnings update due Wednesday, I thought it’d be worth revisiting my argument in light of Apple’s current valuation – and flagging what might support the idea that its future is less than rosy.
First, a reminder: the vast majority of Apple’s revenue comes from hardware: MacBooks, iPads, and iPhones in particular. Even before the pandemic, however, the number of handsets Apple sold each year was in decline – and that figure’s been put under further pressure by store closures and product delays.
In a bid to replace those lost sales, Apple’s betting big on highly profitable services like iCloud, the App Store, Apple Music, and TV+, as well as news, gaming, and fitness offerings. But that’s a move Apple’s now been making for a decade – and with little major success to date, there’s a risk stagnation could undermine shareholder confidence. (Read more about this in Related Content.)
Apple’s stock price is nevertheless up some 15% since September, while analysts’ earnings estimates for 2021 remain roughly unchanged. That means this September chart, which shows a rising divergence between the company’s price and its earnings, would now look even more extreme.
Similarly, Apple’s stock today is even more expensive compared to its predicted sales growth and earnings growth, especially when put next to the company’s Big Tech peers. Either Alphabet, Microsoft, and Facebook’s shares are too cheap – or Apple’s are too pricey.
In the short term, Apple will probably be fine. Next week’s results will likely show strong iPhone sales driven by the new models, with China contributing a bigger proportion than ever before. Rival Huawei’s US blacklisting should have helped send more upwardly mobile and economically buoyant Chinese customers straight into Apple’s arms.
In the long term, however, there’s plenty of cause for concern. Apple’s reduced demand for components in its flashy flagship iPhones since October, with suppliers instead building more of the cheaper new models. If Apple’s finding it harder to foist expensive hardware onto even loyal users, expecting them to spend more money on its services may look overly optimistic – especially given the intense competition in gaming, music, and video streaming (not to mention app store lawsuits).
Keep a close eye out for any forecasts Apple makes for the rest of this year, too: it’s been avoiding making promises lately. A pessimist might suspect that’s because the company’s concerned about the structural issues facing its hardware and services sales. And when coronavirus is defeated and the world reopens, it may be hard for Apple to convince consumers to splash out on an iPhone instead of the experiences they’ve been unable to enjoy during the pandemic.
With a market capitalization of $2.15 trillion, Apple is the US’s most valuable public company – and its inclusion in several major stock indexes means that exchange-traded funds that aim to track either the tech sector, US companies, or global stock markets as a whole are beholden to its fortunes. In other words, Apple is unlikely to fall far from your investment tree.
As an increasing number of retail investors buy into single stocks, they’re tending to focus on a few well-known favorites, including the likes of Apple. If that sounds like you, that’s not necessarily a problem: buying into companies you understand is, well, understandable. But remember, almost every US stock has risen since last year’s dip. Eventually, companies’ financial fundamentals will catch up with them – and investors will sort the wheat from the chaff.
Even if this Insight doesn’t push you into action, it’ll hopefully get you thinking. Apple isn’t just a case of right or wrong, or buy and sell – it’s a complex company which should encourage you to think about the longer term and the bigger picture when it comes to critically assessing valuations. That, at least, is how professional analysts and investors would go about things…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.