Is Apple Too Pricey? A Look At Valuations
On Friday, I spoke with The Street’s Kaitlin O’Toole and Nelson Wang about Apple as an investment in the third quarter. The brief interview was a follow up to my recent piece on the same subject.
In the conversation, I offered the following take:
Today, I take a quick look at a couple of graphs to gather more insight into Apple’s valuations.
Apple vs. peers
To understand Apple’s current valuation, I started with Stock Rover’s quantitative screen. The table below depicts the platform’s value scores, which in turn look at “EV-to-EBITDA, P/E, EPS predictability, price-to-tangible book, and price-to-sales. The best companies score a 100 and the worst score a 0.”
Notice that, compared to a peer group of consumer electronic vendors, Apple does not score too poorly, at 76. While Wall Street analysts currently believe that shares are worth only $344 (although this target is likely very outdated), Stock Rover’s proprietary valuation tool pins fair value at around $475 to $480, with a very comfortable margin of safety of 25%.
Worth noting, however, Apple’s value score was a much more enticing 94 only five years ago. This number has been dropping gradually between then and now.
Apple vs. itself
Looking at a peer comparison alone may not be enough to draw firm conclusions on whether Apple shares are affordable. I believe it makes sense to look at Apple’s valuation relative to itself over time as well. Check out the graph below.
Notice that the stock trades today at a fresh 10-year peak on whatever key metric one chooses to look at: P/E, EV-to-EBITDA and price-to-book. From this perspective, and contradicting Stock Rover’s quantitative assessment above, Apple’s valuations certainly look stretched at current levels.
I would point out, however, that the Apple of today is very different from the Apple of even five years ago – when the stock was substantially cheaper. First, the company is much more of a service and software provider today than it was back then. This kind of business profile alone means that Apple stock should deserve a higher valuation multiple.
Second, Apple has found in wearables, primarily, a source of growth that it had been lacking with the iPhone in the middle of the decade. Once again, better growth prospects should be enough to justify at least some multiple expansion.
Not an obvious answer
At the end of the day, it is still hard to say with certainty whether Apple shares are overly stretched or still attractively priced. This is much less of a “slam dunk” and more of a story of pluses and minuses.
In my opinion, Apple still deserves some serious consideration by most long-term, growth investors. This is particularly true during a year of uncertainty and risk, as is the case of 2020. Apple’s strong brand identity, competent management team and rock-solid balance sheet are all important assets to have during times like these.
Explore more data and graphs
The graphs used in this report were provided by Stock Rover. I have been impressed with the breadth and depth of information on markets, stocks and ETFs that this platform provides. Stock Rover also helps to set up detailed filters, track custom portfolios and measure their performance relative to a number of benchmarks.
To learn more, check out stockrover.com and get started for as low as $7.99 a month. The premium plus plan that I have will give you access to all the information that went into my analysis and much more.
(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)