About a month ago, Apple (NASDAQ:AAPL) announced a 4-for-1 stock split which Wall Street cheered and which I said offered a solid buying opportunity. Since then, AAPL stock has officially split, and shares have rallied nearly 25% to all-time highs.

That averages out to a return of more than 1% per trading day. Perhaps more shockingly, Apple is now worth $2.2 trillion — or more than 10% of the U.S. economy.

At this elevated valuation and on the heels of such an enormous rally, AAPL stock has lost some of its appeal.

Yes, the company and stock are still long-term winners. But in the near term, shares look maxed out and unnecessarily stretched.

That hype is probably sustainable. 5G will be huge for the company, and low rates are here to stay. But with the AAPL stock price today now detached from fundamentals, the risk-reward is less compelling.

What does this mean? I think it is time to act less bullish and more cautious.

Here’s a deeper look.

A Great Company

Make no mistake about it. Apple is a great company, and Apple stock is a long-term winner.

The company’s ecosystem of smart hardware products — centered around the iPhone, but inclusive of the iPad, Mac and Apple Watch — is ubiquitous. Consumers everywhere own these products, and use them every day, all the time. More than that, this ecosystem is exceptionally sticky, because of the user-friendly iOS interface, network effects such as iMessage (it’s annoying texting someone and seeing green, right?) and built-in marketplace benefits with things like the App Store.

Big picture: Apple has an enormous global hardware install base that isn’t going anywhere anytime soon. This loyal install base will promote continued healthy growth in Apple’s hardware business through phone, computer, tablet and smartwatch upgrades every few years.

More importantly, Apple is monetizing that enormous hardware install base through a variety of compelling, value-add software services like Apple Music, Apple TV+ and Apple News. Uptake of these services has been robust and will continue to be robust because: 1) they are services which consumers like, and 2) they are easily accessible to consumers who have iPhones and iPads.

This software business operates at higher gross margins than the hardware business. It’s also built on the back of recurring, subscription revenue streams, whereas the hardware business is built on the back of lumpy and cyclical product revenues. Thus, the ramp of Apple’s software business will improve the company’s profit margins and expand the valuation multiple Wall Street gives to AAPL stock.

It doesn’t take a rocket scientist to connect those dots.

Stable hardware revenues. Roaring software revenues. Expanding margins. Rising valuation multiple. That’s a recipe for sustained gains in AAPL stock.

An Extended Valuation

The only problem I have with AAPL stock is that, in the near term, the valuation seems to have run ahead of the fundamentals.

In numbers, Apple isn’t a big growth company. The hardware business will sustain 0%-2% revenue growth over the next few years — with exceptions when there are big upgrade cycles, like what will happen with the 5G iPhone — because the global smart hardware market is pretty much saturated. Everyone who wants a smartphone already has one, for the most part.

Meanwhile, the software business is ramping. But from a much smaller base. So even if that business continues to grow at a 10%-plus pace for the foreseeable future, you’re still only talking 4%-5% overall revenue growth from Apple.

Gross margins will improve. So will operating margins. Thus, 4%-5% revenue growth will turn into roughly 10% profit growth.

That’s good. But it’s not great.

And AAPL stock today is priced for great.

My numbers suggest that Apple could do about $5.50 in earnings per share by 2025. That’s well ahead of consensus sell-side estimates, which sit below $5. A 25 times forward earnings multiple on that implies a 2024 price target for AAPL stock of $137.50.

We are nearly there today. And it’s not even the end of fiscal 2020.

5G  and Low Rates Propping up Apple Stock

Clearly, Apple stock is presently being propped by something more than fundamentals.

That something more is actually two things.

First, you have a ton of hype heading into what projects to be an iPhone upgrade super-cycle in 2021, thanks to the launch of the 5G iPhone later this year.

Second, there’s the low rates dynamic, wherein low fixed income rates are bringing down the implied cost of equity and boosting stock prices across the board, especially on those stocks with high visibility to future growth (which Apple does have).

This optimism isn’t misplaced. The 5G iPhone will be huge, and the Federal Reserve has broadly implied that lower rates will stick around for the foreseeable future.

So I wouldn’t be surprised at all if AAPL stock continues to rally over the next few months and quarters as the company sells a ton of 5G iPhones and rates remain close to zero.

But, because the valuation is stretched and the fundamentals imply muted long-term upside potential, I think it’s time to start acting less bullish and more cautious on this name.

Bottom Line on AAPL Stock

Apple stock is a long-term winner that has sprinted into overvalued territory.

This overvaluation may not stop the rally. There are a lot of things working in favor of AAPL stock at the current moment, so shares may keep heading higher over the next few months and quarters.

But because of this overvaluation, near-term caution is absolutely warranted.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.