Apple Stock Is Still Overvalued And May Tread Water For Some Time

Apple (NASDAQ:AAPL) stock has risen 58% in the last 11 months and it may be at a peak that could last a while. After AAPL stock basically stayed flat over the past month, I suspect that until the company grows into its high valuation it could be dead money for a while.

Apple (AAPL) stock information in a magnifying glass.
Source: dennizn /

AAPL stock closed out November up 3.2% compared to a 8.4% gain in the NASDAQ 100 index tracking exchange-traded fund Invesco QQQ Trust (NASDAQ:QQQ), helped in part as Apple shares clawed back up in the last couple of days. Moreover, in the past three months, AAPL has actually fallen 6.74%, while the NASDAQ has risen 4.99%. These figures do not include dividends but just register the price movements.

Apple has a $1.97 trillion market value. This makes it the second-largest stock in the world, in terms of its market capitalization. Saudi Aramco (TADAWUL:2222), which trades only on the Saudi Arabian bourse in riyals, is the largest with a $2.13 trillion market cap. This is not on a major exchange, so, for all intent and purposes, Apple is the largest liquid stock in the world.

In other words, the law of large numbers may be affecting its performance. The valuation both on an absolute basis and in terms of price-to-earnings (P/E) and forward metrics is so high, there might not be much upside.

AAPL Stock’s Valuation Conundrum

Last month I wrote that AAPL stock is at a peak valuation in its history. So far nothing has changed about this and the stock still trades at its highest price-to-earnings multiple in its history.

For example, Apple shares trade for almost 29.5 times fiscal 2021 (September) forecast earnings per share (EPS), according to data on Yahoo! Finance. And this assumes that those earnings rise by 20.4% next year. But EPS rose just 10.4% this past year.

In fact, earnings per share actually fell 3.9% this past Q4 ended Sept. 26. EPS were 73 cents vs. 76 cents in Q4 2019.

Those low numbers don’t really deserve for AAPL stock to trade at 30 times earnings. As I pointed out in my last article, its average P/E ratio over the last five years is substantially below this level.

For example, Morningstar reported that the average forward P/E ratio has been just 16.6 times earnings. By this measure, AAPL stock is too expensive by 78%. This is a hard measure to overcome in terms of valuation metrics.

Therefore, it seems highly likely that Apple will have to grow into its earnings, as I suspect this valuation peak cannot last. For example, even if earnings were to rise 25% for the next two years, the P/E ratio will still only be 22.7x. That is still higher than the 16.6x P/E.

So you see the conundrum that AAPL stock is in. At its present valuation, it is simply too expensive and needs to drop.

But short of that it will take at least two years of above-average growth for it to grow into the present valuation. That assumes AAPL stock stays basically flat.

What To Do With AAPL Stock

I am not the only one who thinks the stock may end up treading water. For example, TipRanks shows that the average price target of 32 analysts is just $125.94. That reflects a potential upside of just 5.79% November’s closing $119.05.

Moreover, reports that its survey of 45 analysts has a consensus price target of just $111.48. That implies AAPL stock would have to drop by 6.35%.

To put it simply, this is nothing to write home about. It shows a considerable degree of ambivalence by most analysts concerning AAPL stock’s upside.

Another problem is that the dividend yield is well below 1%. So here were have a stock at a forward P/E of 30x, a sub-1% yield, and with earnings that are suspect to grow above 10%.

That does not give anyone interested in investing in the stock a high degree of confidence in the upside for AAPL stock.

Therefore, I highly suspect that AAPL stock is going to tread water for a good while. I suspect that it is going to seriously underperform the NASDAQ index over the next year.

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

Mark Hake runs the Total Yield Value Guide which you can review here.

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