Apple Reaches Valuation Floor: What Next?

Apple stock continues to underperform in 2021. The good news is that valuation has become more attractive. The Apple Maven presents two graphs that may suggest a buy at current levels.
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Cutting against the grain, Apple ended the February 24 trading session down about -0.4%. On the same day, all major US stock indices, from the S&P 500 to the Nasdaq to the Russell 2000, posted daily gains of at least 1%.

For Apple, bear market territory remains within reach.

Major US stock indices, Jan - Feb 2021.

Major US stock indices, Jan - Feb 2021.

The good news is that, as the Cupertino company’s stock underperforms for the year (see chart above, green line), valuations continue to look better by the day. The two graphs below reveal something interesting about shares that may suggest a buy at current levels.

Valuation floor

It is hard to argue that a price-to-earnings (P/E) ratio of nearly 34 times on Apple stock is a bargain. For reference, shares traded within a range of only 9 and 24 times earnings for the ten years prior to the COVID-19 crisis, between 2009 and 2019.

But things have changed drastically in the past 12 months. The FAAMG group has become an even more dominant economic force. Interest rates are near all-time lows. Tech valuations have deservingly expanded and may never return to the “old normal”.

With that in mind, I invite the reader to look at the movements in valuation multiples in the more recent past – since August 2020.

Apple Price / Earnings 33.8

Apple Price / Earnings 33.8

The chart above shows that P/E broke through the 30 level for the first time ever following Apple’s blowout fiscal third quarter results (at the same time that the 4-to-1 stock split was announced). Since then, the multiple never returned to what it used to be.

In fact, as the dotted red line illustrates, P/E seems to have found a floor at around 33 times over the past six months. Whenever the multiple dipped back to those levels, the stock rebounded, suggesting that there was enough demand for shares at that point.

Guess what? Apple stock is back to trading near 33 times earnings once again.

Something similar can be observed with at least one other key valuation metric. Price-to-cash flow has dipped from 28 times in late January to 24.5 times today. Whenever the multiple got to 24 times in the past half year, the stock rebounded. See below.

Apple Price / Cashflow 24.5

Apple Price / Cashflow 24.5

Twitter speaks

The big question: is the valuation floor reliable? Will Apple stock find enough buyers at these levels to trigger a recovery in the share price, thus preventing a steeper correction into bear territory?

No one can tell for sure. But I have asked the Twitter-verse for its opinion on the matter. Below are the results of the poll:

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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)