On November 4, Satori Fund’s founder and CNBC regular Dan Niles made his argument against Apple stock (AAPL) - Get Apple Inc. (AAPL) Report. According to him, shares of the Cupertino company are “the most overpriced” in tech, and he favors an investment in Alphabet (GOOG) - Get Alphabet Inc. Class C Report and Meta/Facebook (FB) - Get Facebook, Inc. Class A Report instead.
Today, the Apple Maven looks at Mr. Niles’ seemingly bearish case and assesses whether AAPL stock may, in fact, be too expensive at current levels.
(Read more from the Apple Maven: What The Fed’s Decision Means For Apple Stock)
Niles’ cautious stance
Dan Niles’ aversion to Apple stock can be summarized in the following quote: “if you look at it in terms of how much [Apple is] growing relative to the multiple, it just doesn't make any sense”. He elaborates by pointing out that Apple has grown revenues at only 11% annually for the past five year, less than virtually all mega-cap tech companies – but that the stock’s multiples are higher than FB’s and GOOG’s.
Dan also set aside valuation and looked at financial performance. The portfolio manager mentioned how the pandemic helped to boost hardware sales, but that the tailwinds will eventually cease. On the services side, Mr. Niles sees regulatory risk in App Store, and believes that the stock’s multiples could decline if App Store commissions are cut further – they have already, for certain developers.
Our view on valuation
There is quite a bit here to dissect. In fact, I see Dan Niles’ argument against Apple as a catchall of the most popular, “greatest hits” bearish theses on the stock: (1) rich valuations, (2) a drop off in pandemic support and (3) regulatory risks.
On the first point, I agree that AAPL’s next-year earnings multiple of 26 times is far from being a bargain. Keep in mind that EPS growth projections through fiscal 2025, according to Seeking Alpha, is only around 7% per year. The implied PEG (P/E over longer-term EPS growth) of 3.7 times is higher, for example, than Amazon stock’s (AMZN) - Get Amazon.com, Inc. Report 2.4 times.
But I believe that AAPL deserves to command a richer multiple than some of its tech peers, as it has over the past many years. The company has a more diversified business model, which contrasts with Alphabet’s and Facebook’s overdependence on ad dollars. Despite its focus being “spread thin” across a wide array of products and services, Apple has been performing superbly across nearly all of them.
Here is another example of how Apple seems to be much better positioned within the tech space. When Snap (SNAP) - Get Snap, Inc. Class A Report reported disappointing earnings driven by Apple’s change in user policy, the entire internet and social media space tanked, while the Nasdaq erased $120 billion in market value within minutes. Apple has clearly become a powerful gatekeeper, leaving Facebook & co. with the task of catching up.
Lastly, AAPL’s earnings multiple is higher now than it was three to five years ago. But compared to the post-pandemic peak of 38 times reached in September (when I argued that AAPL deserved to be trimmed a bit), the current P/E is substantially de-risked. See chart below.
Our view on the pandemic support
The end of the pandemic tailwinds has been a problem for some tech companies – but not so much for Apple. While Amazon, for example, has seen its online store revenue growth decline from nearly 40% last year to just north of 10% in the past couple of quarters, the Cupertino company has found demand both during and after the COVID-19 crisis.
Wedbush analyst Dan Ives told the Apple Maven that, regarding Apple, the very idea of pandemic tailwinds is flawed. Here is his quote from our July conversation:
“Don’t lump Apple in with a pull-forward, work-from-home story. Without the retail piece, I think [the pandemic] actually net-hurt them. This is actually why, when you look at iPhone 13 coming out of the gates in Asia, it’s actually up vs. the iPhone 12 pre-COVID.”
The numbers seem to support Mr. Ives’ views. Yes, comps will start to get tougher in the 2021 holiday quarter (see below). Still, Apple is expected to deliver annualized revenue growth of 33% in the next three quarters over the comparable 2018 period (i.e. three-year comparison). There is nothing short of impressive in these figures.
Our view on the App Store
The regulatory risk, particularly regarding the App Store, is the piece of this puzzle that I find the hardest to grasp. Until recently, I thought that this high-margin, high-growth business could be the anchor that drags Apple’s financial performance and the stock’s valuation.
But recently, the Epic Games drama reached what could be an end; antitrust concerns seem to have vanished from the headlines; and AAPL shares kept climbing. Better yet, the App Store posted all-time record revenues in the most recent quarter.
Maybe Morgan Stanley’s Katy Huberty is right in her assessment. She has estimated that Apple’s recent App Store commission concessions could shave a maximum of 1% or 2% of Apple’s EPS. Should this be the case, the impact to share price would be barely perceptible.
Satori Fund’s Dan Niles thinks that AAPL is the “most overpriced tech stock”, and he sees a better deal in GOOG and FB. Which of the three stocks below would you buy today and hold for the long haul?
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(Disclaimers: this is not investment advice. 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)