Apple’s Stock Now Is At Frenzied Levels Seen After 2007 IPhone Launch. Think Different This Time?

Apple’s Stock Now Is At Frenzied Levels Seen After 2007 IPhone Launch. Think Different This Time?

[9/8/2020] Putting Apple’s
AAPL
$180 Billion Decline Into Perspective

Apple’s (NASDAQ: AAPL) market cap declined by a whopping $180 billion on Thursday, after the stock fell by 8% to about $121 per share due to the broader technology-led sell-off. For perspective, Apple’s single-day drop is more than the market cap of oil behemoth Exxon Mobil
XOM
, more than Nike
NKE
, and almost as much as American Express
AXP
and Boeing
BA
combined. That said, Apple stock is still up 60% this year and remains the most valuable U.S. listed company, with a market cap of roughly $ 2.1 trillion. So does Thursday’s sell-off point to further losses for Apple?

See our analysis on Putting Apple’s $180 Billion Decline Into Perspective to see how Apple’s valuation and fundamentals compare with some of the largest U.S. listed companies.

Although Apple stock could hold up at current levels of about $121, driven by anticipation surrounding the 5G iPhone – due in the coming weeks – growth of the services and wearables business, and generally higher valuations for equities, we think the stock remains overvalued. For perspective, Apple trades at about 37x projected 2020 results, up from a multiple of just 17x in 2019. The last time Apple’s P/E was around these levels was in 2007 – when the first iPhone was launched and Apple consequently grew revenues at a compounded annual rate of 45% over the following five years. In the current scenario, we think it’s very unlikely that Apple can sustain even a low double-digit growth rate in the medium to long-term, given the saturating market for iDevices.

[8/25/2020] Does Apple’s Soaring P/E Indicate Much Better Days Ahead?

Apple stock has extended its rally, rising by about 30% since late July to levels of around $500 currently. The stock is up about 65% year-to-date and has more than doubled from its March lows. In fact, Apple’s P/E multiple has soared from 17x in 2019 to close to 39x currently based on projected 2020 results. Now P/E multiples typically reflect the market’s expectation of a company’s future growth prospects. For instance, the last time Apple’s P/E was around these levels was in 2007 – when the first iPhone was launched and Apple consequently grew revenues at a compounded annual rate of 45% over the following five years. Similarly, Microsoft stock’s P/E jumped from levels of around 14x in 2014 to over 28x in 2015, as investors anticipated that growth would pick up due to the company’s cloud transition (this played out well, with Microsoft’s
MSFT
Revenue growth more than doubling to 12% a year between FY’16 and FY’20, up from 5.5% in FY’12-FY’16). So does Apple’s currently surging P/E multiple mean that much better days are ahead?

We don’t think so. Apple’s annual revenue growth rate slowed to just about 3% over the last five years (FY’15 to FY’20E). Although growth should improve from current levels, driven by the launch of new 5G iPhones and continued expansion of Apple’s Services and Wearables business, sustaining a double-digit growth rate in the medium to long-term will be challenging, given the saturating market for iDevices. So why is the stock rallying? There are other factors at play – namely lower perceived risk for Apple and the low-interest-rate environment. Investors are treating Apple as a safe haven through the current crisis, due to its strong balance sheet and the sizable share buybacks that could support its stock price. Separately, the valuations of the broader stock market have soared with the S&P trading at close to 30x earnings, up from 25x earlier this year, due to the low-interest-rate environment and liquidity infusion via government stimulus. [1]

Our dashboard Why Is Apple Stock Up 3x breaks down the key drivers of Apple’s growth over the last three years.

[7/17/2020] A Reality Check On The Three Trends Driving Apple’s P/E

Apple’s market cap has almost doubled, from about $900 billion at the end of 2017 to about $1.7 trillion currently. Now looking solely at Apple’s fundamentals, the numbers don’t really add up. Apple’s revenues and net profits are up by less than 15% over this period, with revenues growing by roughly $30 billion and profits rising $7 billion. However, investors have valued Apple more richly, with its P/E expanding from about 18x at the end of 2017 to about 32x presently. There are three broad narratives driving Apple’s multiple expansion, namely, the pending launch of the 5G iPhone, strong services growth, and Apple’s position as a safe-haven stock. While these factors broadly make sense, there are some real risks that investors should be aware of.

Our dashboard What Factors Drove 135% Change In Apple Stock Between 2017 And Now? breaks down the key factors that drove Apple’s stock price appreciation.

The 5G iPhone: Investors are counting on the 5G iPhone, due this Fall, to jump-start iPhone shipments. However, has an upgrade in wireless technology really kick-started iPhone sales in the past? Not quite. We see that Apple’s iPhone shipment figures are more responsive to major design-overhauls and form-factor changes than big upgrades to wireless tech. For instance, looking back at FY’13, the year Apple launched the iPhone 5, its first 4G handset, shipments expanded by just 20% year-over-year, down from the previous year when shipments grew 73%. Apple saw iPhone shipments grow by a stronger 37% over FY’15 when the larger screen iPhone 6 was launched. Considering this, there’s every possibility that sales could remain muted over the 5G cycle as well if the devices look and feel similar to the iPhone 11 series. Moreover, with the ongoing pandemic, people may see little reason to upgrade to pricey smartphones with the latest cameras and wireless standards as they spend more time at home.

Apple’s Services Business: Services have played a major role in the growth of Apple’s stock price, thanks to its thick margins and revenue growth. However, there are some key risks here as well. We estimate that about $28 billion of Apple’s total $46 billion in services revenues in FY’19 came via commissions – essentially taking a cut of app sales, subscriptions, and traffic acquisition payments from search engine providers such as Google
GOOGL
. That’s a whopping 60% of services revenue. Why is this risky for Apple? Firstly, Apple could face anti-trust risks given its market power in this space. Secondly, digital services providers may also stop in-app subscriptions from Apple devices to bypass Apple’s cut, just as Netflix
NFLX
did in early 2019. Sure, Apple does have other services that are growing quickly, such as the Apple TV+ streaming video, but margins will be much lower compared to commissions – which are likely almost pure profit. Our dashboard Breaking Down Apple’s Services Revenue estimates the revenue figures for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.

Apple As A Safe Haven: Investors are increasingly treating Apple stock as a safe haven through the current crisis, on account of its strong balance sheet and the sizable share buybacks that support its stock price. However, to be sure, Apple is far from a risk-free investment. On one hand, if the Covid-19 crisis gets worse, Apple’s sales and cash flows could come under pressure hurting its stock price. On the other hand, if Covid-19 is contained and the broader economy rebounds strongly, investors could start moving back to riskier assets, reducing demand for Apple’s stock.

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