We think that the recent rebound of Apple is unreasonable
Editor’s note: This article comes from the WeChat public account” beast Finance “(ID: mengshoucaijing) , author: beast Finance. Original title “[Mengshou Finance] We think Apple’s stock price is a little expensive at this stage”
We think Apple’s recent rebound is unreasonable.
We did not sell the stock, but we believe that Apple may be overvalued by about 28%.
At the time of writing, the S&P 500 index has fallen by about 7.2% this year, while Apple’s stock price has risen by about 7%. In addition, the S&P 500 index is currently down about 11.4% from the historical high set at the end of February, while Apple’s stock price is only down about 4% from the historical high. In short, Apple performed better than the market in 2019, 2020 and throughout the epidemic of new coronavirus diseases. At this time, this stock seems to be an unstoppable force.
We believe that this stock currently seems expensive.
In the long run, Apple’s stock price has been trending higher. If we sell the stock now and hope to repurchase it at a lower price in the future, we think that the risk is quite high.
We are not willing to take the risks of these stocks because they have strong cash flows, balance sheets, and most importantly, shareholder returns. As long as Apple continues to raise dividends at an acceptable rate, we are content to sit back and watch and deal with unusually high stock risks.
Others who want to increase Apple’s weight may be a little scared that the entire market will rebound from the March low. We believe that buying Apple’s stock in the short term is at a historically high valuation point.
New crown virus, causing trouble for Apple
This overestimation did not start with the coronavirus crisis in 2019, or even in 2020. Although Apple has rebounded for several years now, most of the capital appreciation we see in stock prices is based on improved sentiment and multiple expansions, rather than fundamental growth. In our view, this is a problem for conservative, value-oriented investors.
As the chart below shows, although Apple’s market share almost doubled in 2019, its earnings per share did not increase. This is a rather amazing event, isn’t it? True, since Apple experienced a massive sell-off at the end of 2018, our base is quite low; however, from a fundamental perspective, the increase from $140 to $300 seems a bit overdone.
In 2019, we saw Apple’s price-to-earnings ratio increase from about 12 times at the low point to nearly 26 times at the high point. Although I think it’s fair to say that Apple’s stock price is ridiculously cheap when the price-earnings ratio is only 12 times, but we think that, equally speaking, a company with fundamental growth like Apple is not worthy of having a price-earnings ratio of more than 25 times .
Historically, it has been difficult for the market to evaluate Apple because of its large exposure to hardware (especially the iPhone). In recent years, we have seen Apple try to get rid of iPhone dependence, and more importantly, it pays high attention to and improves its service products.
For many years, we have believed that Apple’s ecosystem is the company’s value. Although some people are concerned about the periodicity of the iPhone, we are concerned about the company’s growing number of active phones. In the early days when the iPhone dominated, we saw that Apple generated revenue through services. However, as products such as iTunes began to decline, Apple’s ecosystem seemed to lose its luster.
Today, Apple’s service revenue is $50 billion per year. Compared with hardware sales figures, this is still dwarfed, but these high-margin, emerging revenues have changed the market’s perception of Apple…
Before 2019, we always believed that Apple should deserve a higher price-earnings ratio. However, when we speak of higher multiples, we are referring to 18-20 times, not 25 times.
In short, although Apple’s balance sheet, cash flow and growing dividends make it an attractive long-term holding, the company’s growth prospects are not enough to prove so highThe price-to-earnings ratio is reasonable.
Historically, Apple’s EPS has been in a boom/bust cycle. We believe that growing service revenue will help reduce bottom line volatility, but has Apple provided the same growth prospects as many large technology companies with similar valuations?
Compare Apple with other large technology companies
At present, Apple is expected to generate a 10.1% CAGR in earnings over the next 3 years (according to current analysts’ generally expected earnings per share data for 2020, 2021, and 2022) with a P/E ratio of 25.7 Times. This means that Apple’s PEG (price-to-earnings ratio relative to earnings growth ratio) will be 2.5 times during this period in the future.
Facebook (FB) is expected to achieve a compound growth rate of 23% earnings per share in the next three years, and the current expected price-to-earnings ratio is about 31 times. According to this estimate, Facebook’s PEG is about 1.35 times during this period.
Alphabet (GOOGL) is expected to generate a compound annual growth rate of earnings per share similar to Apple’s 10% in the next three years. GOOGL’s price-earnings ratio is about 34 times its expected earnings per share, but due to the decline in digital advertising caused by the new coronary pneumonia, this price-earnings ratio is 15% lower than the expected 2020. For comparison, GOOGL’s PEG is about 3.4 times during this period.
The compound annual growth rate of Microsoft (MSFT) is expected to be about 15% in the next three years, and the current expected price-to-earnings ratio is 29 times. This represents Microsoft’s PEG 1.94 times during the period we are discussing.
Finally, compare it with the last large technology company Amazon (AMZN). Amazon is expected to achieve a compound annual growth rate of 32% in earnings over the next three years. The current price-to-earnings ratio of the stock price is 130 times. Like Google, this high price-to-earnings ratio is partly due to Amazon’s expectation of achieving a negative EPS growth of approximately 20% in 2020, which will be higher than normal. In any case, we must use consistent figures for comparison, which makes Amazon’s PEG about 4 times in the same period in the future.
So, how do investors view all these comparisons? Apple is cheaper than PEG than some peers, but more expensive than other technology companies. However, in our opinion, the difference between Apple and companies such as MSFT, GOOGL, FB and AMZN is that it has achieved double-digit growth.
We believe that due to Apple’s dependence on consumers rather than corporate customers, all companies on this list have a longer and stronger growth momentum than Apple. With this in mind, we are simply unwilling to pay the same premium for Apple stock as our other popular big tech growth stocks in the market today.
Conclusion: Focus on fundamentals
However, we think it is more important than the comparison of these peers to look at Apple’s recent performance and ask ourselves, is this stock really worth more than 100% in the past few years?
Of course, analysts are still very optimistic about the rebound in 2021. This rebound theory greatly contributes to the powerful CAGR data we discussed above. However, when we see the terrible economic data on the market, we are not sure whether the US economy will be a sunny year in 2021. There is no doubt that the road to recovery is still long.
Although we still highly believe that Apple will come out of the new crown crisis and recover as a very powerful member in the technical field, this does not mean that we are willing to ignore valuation.
We believe that Apple’s fair value lies in the 18-20x region. This means that the fair value valuation is about $230 per share. This is nearly 28% lower than the current stock price.
As the service sector continues to grow, our target multiple may also continue to grow. However, it will take some time to get the majority of Apple’s sales. Moreover, we believe that in this case, it is meaningless to value these stocks by more than 25 times.
Finally, we believe it is important for investors to realize that quality and value are both important aspects of prudent investment decisions. There is no doubt that Apple is a good company. But after the recent rise, we believe that the company’s valuation is not attractive. With this in mind, we do not feel the need to increase positions.
Beast Finance is committed to let every unwilling young man learn to invest in US stocks and experience the fun and excitement of being the world’s number one company shareholder in the world’s most mature and compliant market. Let every young person have dignity and equal freedom through US stock investment.