Apple Stock Is More Expensive Than It's Been In Years - How Long Can That Last?

Apple's sudden premium marks the coming of age of the Tim Cook era. But at some point, investors will ask if Apple and Cook are really worth it.
Author:
Updated:
Original:

Following blow-out quarterly results on Tuesday afternoon driven by strong sales of the iPhone 11, Apple  (AAPL) - Get Report stock is up about 2.8% on Wednesday. 

However, that increase seems to be a rather muted gain, given the quality of the beat and the fact that analysts are rapidly hiking their price targets, the highest of them now being $400, which would represent almost 23% potential upside from a recent price of $326.40.

The fact that the stock isn't moving that much in response to terrific results may reflect the fact that Apple stock is already much more expensive than it has been for many years.

Since September of last year, when the new iPhone was introduced, Apple shares’ price-to-earnings ratio, based on the next twelve months’ of expected profit, has been higher than the value of the Standard & Poor’s 500 index, something not seen since 2010, when late co-founder Steve Jobs was still in charge.

In fact, Apple’s current forward P/E of 21.81, which is higher than the Index’s 18.2, is the highest it’s been since late 2009, when Apple was selling fewer iPhones than iPods. (That P/E figure takes into account net cash per share of roughly $22, to give Apple credit for its enormous cash horde.)

Why Apple has suddenly surged in value, and whether it can it be sustained, are pressing question for investors.

The sudden premium marks the coming of age of the Tim Cook era at Apple. For most of his tenure since taking over in August of 2011 from the ailing Jobs, Cook’s running of the company didn’t garner a P/E above that of the market, even when sales of iPhone were particularly strong, such as back in 2014 to 2015 with the iPhone 6 "super cycle."

Apple’s forward P/E is still below that of other tech titans, including Facebook’s  (FB) - Get Report 22.45 and Alphabet’s  (GOOGL) - Get Report 24.56. It is also well below that of Microsoft’s  (MSFT) - Get Report 27.54. Microsoft, in fact, is an interesting comparison. Apple’s sudden surge in valuation feels a bit like the transformation of Microsoft stock that happened in mid-2015, when Microsoft shares first returned to an above-market multiple. 

That change reflected the profound shift in investor sentiment under CEO Satya Nadella, following a decade of shareholder discontent under prior CEO Steve Ballmer. It was a shift in sentiment mirroring a shift in Microsoft’s corporate profile, from a has-been software vendor to a cloud computing champ.

Something of the same confidence may now be giving Apple under Cook the imprimatur of a company with staying power. The company has also seen a big shift, with services, such as downloads, and now, streaming video and a credit card, making up a larger and larger portion of the company’s revenue -- 14% of net revenue in the December quarter, up from 13% a year earlier.

But the Cook premium, if that’s what the new Apple valuation is, is paradoxical given that financial results for Apple have been lackluster for years, something no new products seem likely to improve in any meaningful way. Apple’s sales growth in the fiscal year ending this September is expected to be just 8.8%, vastly below the 66% growth Apple had back in 2011, the year Cook took over (of course, as Apple has grown ever larger, it's harder to sustain the rapid growth it had when it was much smaller).

Profit margin, too, has shrunk, with gross profit projected to amount to just 38.4% of sales this year, versus 40.5% back in 2011.

Some portion of the premium may reflect a recent improvement in Apple’s outlook, given that analysts are increasingly looking to what they believe may be a “super-cycle” for the iPhone, starting this fall. That is when Apple is expected to unveil its first “5G” smartphone.

As pointed out by TheStreet, 350 million of Apple’s iPhone installed base of roughly 925 million have not installed their phone in more than three years, according to Dan Ives of Wedbush Securities, who on Wednesday assigned Apple that Street-high target of $400.

Even assuming upside in fiscal 2021, on total revenue of perhaps $309 billion, using Ives’s estimate, only gets Apple to 8.5% revenue growth. Earnings per share on that basis might total $15.26, which would make a $400 stock even more expensive than it currently is, at 25 times those projected earnings.

If financials don’t ultimately justify the newfound P/E premium, then at some point, investors will return to asking what the Tim Cook era is about. It has not produced dramatic new product breakthroughs, other than the Apple Watch and perhaps the AirPods. Instead, it has been a period of steady performance punctuated by occasional worries Apple would not grow at all.

Cook avoided the worst of those fears: Apple is growing, and better than feared a year ago. But as TheStreet wrote back in September, Apple as a company is still in search of a broader mission under Cook than just keeping the business moving along at a steady pace.

Apple as a company hasn’t actually found a new mission akin to Nadella’s cloud shift at Microsoft. At some point, the heightened valuation relative to the market will put back in question just what the nature of the Cook era is at Apple.  

Apple, Facebook, Alphabet and Microsoft are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.