Is Apple (NASDAQ:AAPL) stock overvalued?

Apple shares have doubled in the last year. Can the tech giant keep delivering market-beating returns from here?

| More on:
two apple watches looped around each other

Apple unveiled its Apple Watch Series 6 in September. Image source: Apple.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Apple Inc.'s (NASDAQ: AAPL) stock price is up nearly 60% this year, and it has doubled in the last 12 months. At $2.16 trillion, the company's market capitalisation is the largest on the U.S. exchanges; and until a recent pullback, shares were repeatedly hitting all-time highs. 

Those data points might scare some investors away. After all, the company was already huge. Now, its market cap is roughly $400 billion more than the next two largest companies, fellow tech giants Amazon.com, Inc. (NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT), which are both around $1.7 trillion.

Is Apple's big run a result of overly exuberant investors who have sent it soaring too high? Or can this tech behemoth keep getting bigger and continue to produce market-smashing returns?

The valuation has gone up -- a lot

Here's a look at some of Apple's key valuation metrics and how those compare to a year ago:

Date

P/E Ratio

P/S Ratio

P/FCF Ratio

October 2020

35.7

7.6

29.0

October 2019

19.2

4.1

17.9

Data source: YCharts. Data through market close Oct. 9. P/E = price-to-earnings; P/S = price-to-sales; P/FCF = price-to-free-cash-flow

Those numbers illustrate that investors have gotten much more optimistic about Apple in the last year. A year ago, a dollar of sales was valued at $4.10 in the stock price. Today, that dollar is valued at $7.60. The same thing has happened with the company's earnings and free cash flow. Put simply, Apple's stock price has gone up much faster than its earnings, sales, and free cash flow.

How do these metrics compare to its largest tech company peers? Here's a look.

Company

P/E Ratio

P/S Ratio

P/FCF Ratio

Amazon.com, Inc. 

126.5

5.2

61.8

Microsoft Corporation

37.5

11.6

36.7

Apple Inc.

35.7

7.6

29.0

Data source: YCharts. One-year change in valuation through the close of trading Oct. 9. 

While Apple's valuation has risen quickly, it remains lower than those of its peers. One reason is Amazon and Microsoft have higher growth rates. Amazon is forecast to grow adjusted earnings per share by 38% this year, and Microsoft just completed its fiscal year with 21% year-over-year growth. By comparison, Apple is expected to grow 9% in fiscal year 2020, which ended in September.

Reasons for investor optimism

In recent years, Apple's iPhone sales growth stalled, and the device accounted for about two-thirds of the company's total revenue. If iPhone sales weren't growing, investors wondered, how would Apple grow?

That skepticism was reflected in the company's relatively low valuation. In May 2016, when legendary investor Warren Buffett started scooping up Apple shares for Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B), Apple's P/E ratio was only about 11. It has since tripled, and a lot of that expansion has come in the last year. I believe there are two main reasons investors have changed their view of the company.

First, there's optimism that iPhone sales could be in for a boost. On Oct. 13, Apple is expected to announce that its iPhones released this fall will support 5G connectivity, a technology that could significantly improve download speeds. That update could prompt many iPhone users -- and there are about a billion of them -- to upgrade to a new phone.

Second, Apple has been diversifying its revenue streams. In early 2017, CEO Tim Cook said he wanted the company to double its services revenue by 2020. That has happened, and in the quarter ended in June, the company set a record for services revenue ($13.2 billion). Apple has an installed user base of more than 1.5 billion devices, and if it can get those customers to increase their use of services like Apple Music and the App Store, that will fuel growth.

The company also has grown its wearables, home, and accessories segment, which includes products like AirPods, Apple Watch, and Beats. When Apple reports full-year earnings on Oct. 29, it will have more than doubled the segment's revenue in just three years.

Those two segments are having a much more meaningful impact on revenue. In 2016, they accounted for just 16% of Apple's revenues. Through the first nine months of fiscal year 2020, they produced $62 billion, accounting for 30% of total revenue. Even with that growth, the iPhone still accounts for more than half the company's revenue.

Is Apple overvalued?

Valuation is in the eye of the beholder. That means the question of whether Apple is overvalued can only be answered by each investor. After all, the market is built on people taking opposite sides of trades: buyers and sellers.

For investors who emphasize traditional valuation metrics, Apple probably looks scary. It hasn't had valuations this high in more than 10 years.

For investors who look at Apple as one of the most innovative companies of all time, the perspective could be different. The company's innovation has helped build a massive and loyal customer base, which is why Forbes magazine ranks Apple as the world's most valuable brand year after year.

With that track record of innovation and customer loyalty, I don't think Apple is overvalued. Historically, there has never been a bad time to buy Apple stock, as long as you held those shares. As a $2.16 trillion company, Apple's largest growth days are behind it, but I think it can continue to provide long-term investors with market-beating returns for years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Mike Strain owns shares of Amazon, Apple, Berkshire Hathaway (B shares), and Microsoft. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), and Microsoft and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Amazon, Apple, and Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

If you invested $10,000 in Nvidia stock the day ChatGPT came out, this is how much you'd have today

Buying Nvidia when the disruptive AI chatbot launched would have been a smart move.

Read more »

A Tesla car driving along a road at sunset
International Stock News

Why Tesla stock was climbing today

Investors were encouraged by news of a price hike on the Model Y.

Read more »

Plate with coloured wedges being parcelled out like a slice of pie representing a share split
International Stock News

Stock-split watch: Is Nvidia next?

Nvidia last split its stock when it traded for a pre-split $744 in 2021.

Read more »

A woman in jeans and a casual jumper leans on her car and looks seriously at her mobile phone while her vehicle is charged at an electic vehicle recharging station.
International Stock News

1 Wall Street analyst thinks Tesla stock is going to $125. Is it a sell?

Tesla is no longer a magnificent stock, according to a Wells Fargo analyst.

Read more »

A young man goes over his finances and investment portfolio at home.
International Stock News

Is Nvidia stock a buy?

The company's stock could rise 40% over the next two years and outperform the S&P 500.

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Is Nvidia headed for a stock split?

Nvidia stock has split five previous times in the company's history.

Read more »

Digital rocket on a laptop.
International Stock News

Nvidia shares surged (again) today. Is it too late to buy the red-hot artificial intelligence (AI) growth stock?

Nvidia stock has gained nearly 300% over the past year. Can investors still profit from this AI stock?

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Can you buy Nvidia shares on the ASX?

This stock has rocketed higher. How do we get access to it?

Read more »