Apple Inc. (NASDAQ:AAPL) is the largest company on the planet earth. For nearly 40 years, it has brought us innovation after groundbreaking innovation. From music and media to aesthetics, communications, healthcare, and beyond, Apple’s sphere of influence is too massive to expound upon meaningfully without writing an entire book.
AAPL stock, on the other hand, is a ripoff.
That sentiment is a tough cookie to swallow for most stock market investors. The U.S. economy is chugging along quite nicely, especially compared to the rest of the world; some portfolio managers even expect the U.S. to contribute more to global GDP growth this year than China.
America’s economic growth could exceed the growth of emerging economies this year for the first time since 1999. And with oil prices in the gutter, Americans had more spending money in their pockets this holiday season.
So AAPL stock would appear to have some excellent macro tailwinds right now. Analysts seem to agree: Today, Janney Capital Markets raised its iPhone sell-through estimate for the December quarter from 60 million units to 62 million units. AAPL stock soared on the news, which came a day after UBS came out with similarly bullish estimates that topped consensus estimates.
Apple, the business, is doing great. It’s in the best shape it’s ever been in. But AAPL stock is overvalued. Here’s why:
AAPL and Its Terrible, Horrible, No Good, Very Bad Valuation
Apple, Tesla Motors Inc (NASDAQ:TSLA), and Amazon.com, Inc. (NASDAQ:AMZN) are all household names. Each stock is closely watched by Wall Street professionals and individual investors alike. But — and this is the thing many AAPL investors don’t understand — AAPL isn’t a growth stock any more. Only TSLA and AMZN are.
Tesla is very clearly in the early stages of its life as a company. TSLA is expected to do $3.72 billion in revenue in the 2014 fiscal year. General Motors Company (NYSE:GM), for comparison, is expected to do more than $156 billion, and analysts are calling for Ford Motor Company (NYSE:F) to do $137 billion in FY 2014. TSLA is building a massive gigafactory in Nevada that should transform its production capabilities. There’s no telling how much growth remains in store.
Amazon, while far, far bigger than Tesla — AMZN FY 2014 projected revenues approach $90 billion — is a growth stock for the simple reason that Jeff Bezos doesn’t seem to care for profits. From a same-day delivery service, to testing delivery by drone to its failed smartphone to launching its own line of diapers, there doesn’t seem to be an endeavor on this earth that AMZN won’t spend millions of dollars on. Once it stops investing in baby wipes and other extraneous initiatives, Amazon’s margins will soar and AMZN stock should reap the benefits.
Apple, on the other hand, has limited growth going forward. Its sheer size alone will naturally drive down its returns in the future. If a firm grows fast enough for long enough, it eventually becomes the size of the whole economy, and that’s not logically possible.
And while AAPL EPS grew at 80% in 2011 and nearly 60% in 2012, Wall Street expects EPS growth of about 20% in FY 2015 and 10% in FY 16. Similarly, analysts expect revenue growth to slow, with a projected growth rate of 15.6% in FY15 and just 5.8% in FY 16.
Even if you face the facts and admit that AAPL is no longer a growth stock, a value investor would have to be outside of their minds to touch these shares. Apple’s P/E ratio, which sits just above 17, hasn’t been that high since March of 2012. Its current multiple is about 20% higher than its 5-year average P/E of 14.5.
I can understand why Apple is so richly valued, considering the constant shower of love that it gets from the media and Wall Street analysts. I myself own the stock, but the buzz around the company is getting so euphoric that I’m tempted to take this as a cue to practice Warren Buffett’s famous mantra: “Be fearful when others are greedy, and greedy when others are fearful.”
As of this writing John Divine owned shares of AAPL stock. You can follow him on Twitter at @divinebizkid.
