Apple Still Looks Expensive But iPhone Launch Could Push It Higher


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Apple (NASDAQ:AAPL) stock is down 10% since the end of August, which is also when the stock implemented its 4 for 1 stock split. Nevertheless AAPL stock is still up over 52% so far this year, and more than 100% in the past year.

It’s hard to believe that the company’s underlying value grew by that much over that period. In other words, it is highly likely that what drove the stock price up was investor sentiment pushing up its price-earnings ratio and other valuation multiples.

For example, 38 analysts polled by Seeking Alpha show an average EPS for 2020 of $3.25 for 2020 and $3.86 for 2021. Apple stock has a forward 2020 P/E multiple of 34.5 times earnings for 2020 and 29.9 times for 2021.

These multiples are significantly higher than the average history over the past five years. Morningstar has a page that shows that the average P/E has been only 17.4 times earnings each year over that period.

In other words, AAPL stock is about 82% overvalued compared to that metric. But keep in mind that assumes that the stock has to revert to its prior five-year average. That may not ever happen. But it could show the trend of the stock going forward.

In other words, there may be a consolidation period, where the stock trades laterally while the earnings “catch up,” so to speak. This will tend to lower the P/E ratio without the stock falling.

On the other hand, Apple is not overvalued in relation to its historical dividend yield. Seeking Alpha has a page that shows that its average yield over the past four years has been 0.37%. That is pretty low.

But Apple’s dividend yield today, based on its 82-cent-per-share dividend payment, is higher than that, at 0.72%. In other words, the stock has to rise in order for the dividend yield to reach its average yield.

To find this number we divide 82 cents by 0.37%. That equals $221.62, or $98 above its price on Friday, Sept. 11 of $112.00.

So, on the one hand, AAPL is too expensive on a P/E basis, by 82%, and on the other hand, with dividend yield, it’s 98% too cheap. In effect, they cancel each other out and leave AAPL stock without a historical valuation driver.

Barron’s quotes a Baird analyst, William Power, who says investors should buy AAPL stock, despite the recent pullback. He cites the company’s increasing market share and the strength of its “product ecosystem.”

Another analyst on Seeking Alpha from Stone Fox Capital cites the company’s 5G iPhone launch event in October and expectations that Q4 will show “robust” sales. He believes the stock is “already too expensive,” especially if the 5G launch does not go as well as planned.

Prior to the recent downturn, an analyst at D.A. Davidson, Tom Forte, was quoted by CNBC as writing that Apple is undervalued. He believes that Apple’s 5G lineup and the increasing trend to remote work will push the stock higher.

Barron’s quotes the Baird analyst as saying that the company’s Sept. 15 rollout of its 5G iPhones, which ship in October, could end up pushing the stock higher. This is consumers could become more willing to buy a new iPhone because of the 5G features. CNBC says that it will release four models with three different screen sizes.

The 5G launch event could indeed act as a spark, but the company runs the risk of a sharp Osborne effect. Osborne Computer went out of business in the early 1980’s when they pre-announced a new model of computer. No one was willing to buy the existing models so the company’s sales dived.

I am not implying Apple could go out of business. But 5G is such a new type of technology that many buyers may wait until all the kinks work themselves out. This could end up having the effect of lowering sales of existing models while they wait for a new and better 5G iPhone comes out.

AAPL stock is expensive on a P/E basis, and undervalued on a dividend yield basis. This might mean that the stock actually treads water for a while before continuing its rise.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

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