Well, I guess there’s a first time for everything. I would have never imagined advocating against adding more Apple stock to your portfolio. But here I am, making a case to avoid the stock at present multiples. And it’s not without reason. Apple (NASDAQ:AAPL) stock trades at 34.95 times forward price-to-earnings, the most expensive in all of the FAANG stocks, barring Amazon (NASDAQ:AMZN).
Now I know what you think when you read this, this is Apple we are talking about. It’s as safe a bet as Fort Knox — there’s no way you can go wrong with investing in this. Well, that is right and wrong at the same time.
While Apple stock is undoubtedly an excellent investment, you would still want to add at a time when shares are trading at somewhat of a discount. But that is not the case at the moment. A bumper quarter and the upcoming four-for-one stock split have led to shares climbing $100 over the pre-virus all-time highs.
Bottom line: Apple stock is costly; allow it to cool off before buying more shares.
AAPL Stock Is Trading at Exceptionally High Levels
The fiscal third quarter was another excellent one for the company, with iPhone, Mac, and iPad sales smashing analyst estimates once again. This came as a pleasant surprise since many expected sales to be weaker owing to the novel coronavirus pandemic.
However, contrary to that, sales shot up the last quarter, as people invested heavily in high-quality machines to power their day to day tasks. I don’t expect that trend to let up in the forthcoming quarters. Plus, Apple is such a strong brand; the products virtually sell themselves now.
Aside from the great quarter, the other piece of news that got everybody’s attention was the four-for-one stock split. In a press release detailing the move, Apple said the step would “make the stock more accessible to a broader base of investors.”
The company wants to make its shares more accessible to retail investors. These announcements usually result in the share prices soaring for the issuers. The same happened with Tesla (NASDAQ:TSLA), and Apple is no different. But the issue is that these stock splits have little to do with the actual operational strength of the company.
What Will the Stock Split Accomplish?
As we’ve discussed, the stock split is not going to change Apple’s fundamentals. The only reason it’s going ahead is that the company wants to widen its investor base to include more day traders. While that may seem myopic, day traders can end up adding millions to the company’s market cap. We already saw their impact when Hertz (NYSE:HTZ) stock surged after it announced bankruptcy proceedings. That’s all down to young Robinhood app traders, who defied the naysayers and pushed the stock price up, even though it should have nosedived.
AAPL stock will always have positive momentum, just because of its long-term growth story. The day trading will only increase that momentum moving forward. However, management needs to be careful with this strategy. Apple’s juicy dividend yield is one of the main reasons why investors poured capital into the company by the billions. But with share prices soaring, the return now stands at 0.73%.
Considering its history, Apple will not increase its dividend by a fair margin in the coming year. The tech giant has increased dividends gradually over the past five years, and that pattern is unlikely to change. Only time will tell if Apple believes there is a need to increase the dividend distribution by a fair margin to appease shareholders.
How to Play Apple Stock
Like I said in my intro, it is a rare occasion when you argue that Apple stock does not deserve your attention. Unfortunately, that seems to be the case here, since circumstances that have nothing to do with the fundamentals have forced shares up. Apple stock has a fair value of approximately $375 per share by my calculations, while analyst estimates peg the 12-month target at $425.17.
Wedbush Securities analyst Daniel Ives has upped his Apple 12-month price target to $515, with a bullish-scenario price target of $600. That gives you plenty of space to play with, but there is one thing for sure, don’t expect the stock to be trading above $450 this time next year.
Apple has the largest forward P/E ratio among large-cap tech giants, including Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT). Eventually, there will be a market correction, after which shares will trade closer to its fair value. In the meantime, I would suggest cashing in on the rally if you have some Apple stock to spare.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.
