That took awhile. For the longest time, market observers and analysts were throwing Apple (NASDAQ:AAPL) in with the FAANNG group. But AAPL was always the odd man out in the group because it was the only FAANNG stock that traded below 20 times its forward earnings.
Facebook (NASDAQ:FB) has a forward price-earnings multiple of 23, while Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) both have forward price-earnings multiples of over 100. Nvidia (NASDAQ:NVDA) and Google (NASDAQ:GOOG,NASDAQ:GOOGL), meanwhile, are both in the 25 times to 30 times ballpark.
As for AAPL, its forward price-earnings multiple over the past year has been largely below 16, which is the market’s average multiple.
But times are changing. Apple’s Services business is starting to get the attention it deserves, and investors are beginning to give Apple a similar multiple to that of many tech companies. Today AAPL trades at a forward price-earnings ratio of 18, which is more in line with its growth prospects than a sub-16 forward multiple.
But at its current valuation, AAPL is still cheap for a world-class technology company whose revenue is growing at a double-digit percentage rate. As such, this “re-rating” in AAPL stock will continue over the next several years as the Services business ramps and turns Apple into a big software company. During this stretch, AAPL will rise due to a combination of earnings growth and multiple expansion.
Apple Is Turning Into a Multi-Faceted Technology Company
It is becoming increasingly apparent that Apple is becoming one part stable, traditional hardware business, one part hyper-growth new hardware business, and one part hyper-growth software business.
The traditional hardware business (iPhones, iPads, Macs, so on and so forth) is pretty much all dried up. All of its growth going forward is going to come from upgrade buyers, switchers, and higher selling prices. But those three catalysts have enough firepower to stabilize this business even without new buyers.
The new hardware business (Apple Watches, Apple TVs, etc.) is growing really nicely. These products are the new face of consumer technology, and much like the iPhone and iPad, they are the dominant products in their space. Thanks to these new products, Apple’s total hardware business actually has nice growth potential.
Then there is Apple’s software business (Apple Music, App Store, iCloud, so on and so forth). This business is growing at a consistent 30%-plus clip despite tougher comparisons and a bigger base. It has a long runway for growth ahead of it, thanks to Apple’s giant connected-device ecosystem. This business has elevated margins and provides the new-tech component that Apple has been missing for the past several years.
Put this all together, and it looks like the Apple of the future is part consumer products company and part technology company. The consumer products part is priced in. The technology part isn’t. We have seen AAPL soar over the past few months because the market is “re-rating” the stock to incorporate a hyper-growth, high-margin technology component.
AAPL Is Still Pretty Cheap
When you look at AAPL stock’s forward price-earnings multiple of 18, it is easy to see that the shares are still cheap.
Apple’s revenue growth has consistently run north of 10% over the past four quarters and has been touching 16%-17% recently. Its earnings growth has been north of 15% during that stretch, and it has been flirting with 40% gains recently.
Meanwhile, the other FAAANG stocks trade at forward price-earnings multiples of well over 20 times. Granted, Apple doesn’t have the growth potential of Netflix, Amazon, Facebook, Nvidia, or Google. But top-line growth in the 10% range isn’t all that bad, especially when it’s supported by the 30%-plus growth of its Services business. And Apple has a massive moat and stable long-term growth prospects, both of which should factor into the valuation of its shares.
At the end of the day, AAPL stock’s “re-rating” isn’t finished. This multiple still has more room to expand, and its earnings still have more runway to head higher. As such, there is a good chance that AAPL will gain ground in the long run.
Bottom Line on AAPL
When it comes to FAANNG, AAPL is the only name trading below 20 times its forward earnings. Considering the company’s growth prospects are only improving, that sub-20 times multiple makes AAPL stock look attractive for the long run.
As of this writing, Luke Lango was long AAPL, FB, AMZN, GOOG, and NVDA.
