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Apple Inc. (AAPL) Stock Is Overvalued, Wait for a Pullback

AAPL stock may be trading at the high end of its valuation

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A lot of things can change over a year, and Apple Inc. (NASDAQ:AAPLstock is no exception. In May of last year, I wrote about Apple’s problems in China, the second-largest market for AAPL, shortly after billionaire investor Carl Icahn sold the stock.

Apple Inc. (AAPL) Stock Is Overvalued, Wait for a Pullback
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You could have bought Apple stock for under $100 at the time and enjoyed a rate of return greater than 50% if you had held the stock to this day.

Now, Apple stock changes hands for nearly $150 per share.

What happened? The post-election rally accounts for some of the gain (a rising tide lifts all boats, including Apple stock).

But, investors are bullish on AAPL stock for other reasons as well. For example, Apple’s wearables shipments soared 64% year over year in the first quarter, which could spell trouble for makers of fitness trackers such as Fitbit Inc (NYSE:FIT).

And, at its Worldwide Developers Conference, Apple introduced iOS 11, showed off the new and improved iPad Pro, and unveiled its new smart home speaker, the HomePod.

Investors also anticipate strong sales of Apple’s 10th anniversary iPhone, the iPhone 8, later this year. Wall Street firms, including JPMorgan and Credit Suisse, are optimistic about the coming “iPhone Supercycle.” Analysts expect that the strong upgrade cycle that coincided with the release of the iPhone 6 in 2014 will be repeated with the iPhone 8.

Rumors are circulating that suggest the iPhone 8 could include some exciting new features, such as a curved screen with an OLED display and wireless charging. The smart money seems interested in AAPL as well. Carl Icahn is out, but Warren Buffett is in.

Still, some talk of a second tech bubble and worry about the valuation of tech companies such as Apple and Facebook Inc (NASDAQ:FB). The so-called FANG stocks sold off on June 9, which might suggest that investors are waking up to this.

But, how is Apple valued relative to its past?

Gauging Apple’s Valuation

InvestorPlace contributor Bret Kenwell wrote an article in March, advising readers to wait for a pullback before buying Apple stock. He noted that AAPL was trading at an earnings multiple (16.53), which is high relative to the past five years. Now, Apple stock changes hands at 17.42 times earnings.

AAPL stock does look expensive, but I wanted to look at other measures as well, using data going back to September 2010. I decided to look at Apple’s enterprise value, rather than its market capitalization, since enterprise value takes into account a company’s debt and cash and provides a more accurate picture.

I also didn’t want to just examine one metric, since one metric doesn’t tell you the whole story. A high return on equity could be a sign of excellent management, but it could also mean that the company is highly leveraged, raising money by borrowing rather than issuing shares.

And, the best time to buy a cyclical stock, such as Boeing Co (NYSE:BA) or Caterpillar Inc. (NYSE:CAT), might not be when they’re trading at a low price-to-earnings multiple, but at a low price-to-sales multiple.

Why? During recessions, these businesses sometimes operate at a loss. If you only look for stocks trading at low P/E multiples, you could miss some great opportunities to buy cyclical stocks.

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