Back on April 9, I said Apple (NASDAQ:AAPL) stock was one of the best stocks to buy. Roughly six months later, the stock is up 70%.
I still think Apple is a great company, and I believe its stock is a good long-term investment.
However, like much of the rest of the tech sector, its valuation has become bloated. Expectations for the iPhone 12 are extremely high. And stock buybacks are having less of an impact on the company’s earnings per share with Apple’s market cap at nearly $2 trillion.
I’m certainly not bearish on AAPL stock, but now is not the time to buy it.
The Valuation of AAPL Stock
Back in April, I said Apple’s valuation looked relatively attractive compared to a number of its high-tech peers. At the time, the stock was trading at 15.9 times the company’s forward earnings. Today its valuation is up to about 29 times its forward earnings; AAPL stock isn’t looking quite so cheap anymore.
In fact, Apple’s price-earnings ratio, its price-sales ratio, its price-book ratio, its enterprise multiple and its price–cash flow ratio are all currently more than twice their five-year averages, according to Generation Portfolio Management CEO Randall Abramson.
“With the stock priced for beyond perfection, a bad quarter, product flaws, production issues, a cyber-incident, or competitive disruption could lead to a large correction,” Abramson says.
At the same time, the valuations of the entire tech sector have gotten historically stretched as well. For much of the past decade, the S&P 500’s tech sector traded at a forward P/E multiple of around 15 times. Today that forward earnings multiple is 25.5 times.
The good news is that the tech sector’s forward earnings multiples are still nowhere near the peak of the dot-com bubble when they climbed above 45.
But 25.5 times is the highest level since 2004. If last month’s tech selloff resume, Apple will certainly get pulled down with the rest of the group.
Sky-High Expectations
Unfortunately, Apple may not even need to misstep to trigger a correction by AAPL stock. Expectations surrounding the upcoming launch of the iPhone 12 are through the roof. The iPhone 12 is expected to be Apple’s first 5G-compatible phone.
Loup Ventures analyst Gene Munster says that demand for a 5G iPhone will be large. But demand for the product may not be as big or come as quickly as Apple’s 57% rally so far this year suggests.
“5G coverage is still limited, and its unlikely consumers will pay extra for features they can’t use. Starting in the fall of 2021 demand for iPhone 5G will quicken, and we anticipate three years of 10-15% annual iPhone revenue growth, which compares to flat iPhone growth over the previous three years,” Munster says.
In other words, iPhone 12 may end up being a bullish catalyst for AAPL stock, but the positive catalyst may not play out until around a year from now. In fact, much like the recent Tesla (NASDAQ:TSLA) Battery Day, Apple investors sitting on big gains may even see the upcoming iPhone 12 launch as a sell-the-news event.
A Better Big-Tech Bet
Apple is at risk of falling victim to unreasonably high expectations and its own strong market performance in the near-term. But while expectations for Apple are through the roof, the expectations for Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) seem to be at a low point.
In Q2, Alphabet had its first quarter of negative revenue growth in its history. Meanwhile, the U.S. Justice Department is reportedly on the brink of suing the company on antitrust grounds. At the same time, GOOGL stock is up just 24% in the past year, while AAPL stock has soared 110%.
In the long-term, I love both Apple and Alphabet. But in the near-term, I believe AAPL stock is more likely to fall, while Google’s shares are more likely to rise.
Apple has been one of the best stocks in the market in the past 20 years. Buying opportunities have repeatedly been created every time investors start to doubt the company’s growth and innovation. The time to buy AAPL stock is not now when the iPhone 12 launch is right around the quarter. The time to buy Apple will be when investors are panicking about what’s coming next.
On the date of publication, Wayne Duggan held a long position in GOOGL.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market.
