Apple (NASDAQ:AAPL) is a great company, maybe the greatest company. It’s certainly the biggest company, measured by market cap. But Apple is overpriced. AAPL stock is down 16% in September. But Apple is overpriced.
For the quarter ending Sept. 30, Apple is expected to have nearly $63 billion in revenue, and profit of 69 cents per share. But Apple is overpriced.
I personally own 500 shares of Apple in my retirement account. I have no plans to sell right now. But Apple is overpriced.
Because Apple is so huge, its expected fiscal 2020 revenues of $273 billion represent growth of just 5%. Its dividend, 20.5 cents after the recent 4:1 stock split, now yields just 0.71%. The average price target at TipRanks, with 24 of 35 analysts saying buy it, is $122/share, up just 6% from the Sept. 29 opening price of about $115.
Apple is overpriced.
Why Own AAPL Stock?
The common refrain among analysts is that you compare Apple to a bond. Its dividend is just as safe, they reason, and its debt-equity ratio is better. That means Apple is a place for safe money, for conservative investors. It’s becoming a retiree’s stock. I’m 65.
But Apple must run very hard to stay in place. Chinese factories are working full-tilt making the iPhone 12. Apple now gets nearly one-quarter of its revenue from services, but the growth rate is slowing, as it must as it’s now over $13 billion/quarter. Apple’s cloud footprint has stabilized, and its capital budget has dropped by one-third since late 2018.
Where’s the Growth?
Apple is doing everything it can. Revenue for the June quarter was up 11% from the previous year, earnings up 18%. Apple is making more-and-more of the chips that go into its phones, tablets, and watches. The wearables, home and accessories unit revenue can now rival the iPad.
That’s where it needs to seek growth. Apple TV+ is competing with streaming services from Amazon.Com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Walt Disney (NYSE:DIS) and the entire cable business. The Apple Watch could soon get new competition from Alphabet (NASDAQ:GOOGL), which is still trying to acquire Fitbit (NYSE:FIT).
All this is incremental. It’s similar to the problem Walmart (NYSE:WMT) is encountering, what Amazon will soon encounter. At some point you can’t be a growth stock. You either start sharing with shareholders, or they go elsewhere.
Apple is treating Epic Games’ efforts to cut its take on its app store as an existential threat. It is. Whether Apple controls the gaming market is not the issue. Apple controls the Apple market, and along with Google it controls the phone market. Opening up the app stores, even on in-app purchases, is a movement that’s going to grow. Eventually, software is going to win.
The Bottom Line
Global economic power eventually becomes global political power, and the cost of global political power always rises. Thus, nothing grows to the sky. A company becomes an institution, and the institution’s growth eventually matches that of the market.
Given all that, it’s foolish to pay 35 times earnings for Apple. When the price of money starts to rise, Apple must raise its dividend to compete with bonds. Either that or the stock price must fall.
There’s an old saying in technology. Giving money to shareholders means you don’t have anything better to do with it. Apple is coming up between a rock and a hard place.
On the date of publication, Dana Blankenhorn owned hares of AAPL, AMZN and MSFT.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.