After thriving in the novel coronavirus-driven “new normal,” what’s next for Apple (NASDAQ:AAPL) stock? Shares in the FAANG component have gained around 67.5% so far this year. But, with its valuation stretched, shares may not move much higher in the near-term.
That’s not to say it’s high time to bail on the iPhone maker’s shares. Sure, if markets overall correct or sell-off, shares could easily dip from today’s prices. But, given its a high-quality stock in an interest-rate environment favorable to equities, it’s doubtful we’ll see shares fall from triple-digits down to double-digits.
So, what does that mean for investors today? Consider shares a “hold.” Those who got in at lower prices, before markets fully priced-in its “stay-at-home economy” tailwinds, have little reason to sell. Risk-averse investors may find shares a buy at today’s prices too, as this remains one of the highest-quality stocks out there.
But, those who are looking for a high-risk, but high-return opportunity? Look elsewhere.
Valuation Already Stretched for AAPL Stock
As I previously discussed, there’s much to be excited about with Apple stock. Between strength in its hardware business, and the company’s continued success pivoting towards a services-based revenue model, things continue to hum along for the big tech powerhouse.
With this in mind, it’s no surprise the analyst community remains highly bullish on its prospects. As our own Louis Navellier wrote Dec 2, in the past few weeks several Wall Street analysts have set highly optimistic price targets for the stock. The first one, Wedbush’s Daniel Ives, rose his price target to $150 per share (Apple trades for around $123 per share today). His rationale? Ives is bullish on both strong iPhone 12 demand in China, as well as the popularity of Apple’s wireless AirPod earbuds and M1 MacBooks.
The second price target increase, Morgan Stanley’s Katy Huberty, is even more aggressive. Citing similar rationale as Ives, Huberty gives the stock a price target of $191 per share. Yet, while these bullish forecasts have helped to put a few points into AAPL stock in recent days, will either one come to fruition?
It’s debatable. Namely, because shares are already priced as if the company is going to hit the top range of earnings estimates. The most bullish projections call for earnings of $4.45 per share in Fiscal 2021 (year ending Sep 2021). Based on today’s price levels, that implies Apple shares are currently trading for a forward price-to-earnings (P/E) ratio of 27.6.
I agree its multiple can expand from here, if results meet or exceed expectations. But, when it comes to additional near-term gains, I don’t see shares hitting either analyst price target.
Lower Potential Return, But Still Lower Risk
So, if I don’t see AAPL stock surging to Ives’ and Huberty’s projections, how much more could it climb? At most, up to between $130 and $135 per share. Why? Historically, shares traded at an earnings multiple well below recent levels.
But, with the dramatic interest rate changes we’ve seen in 2020, I don’t see P/E contracting back to 20x-25x. I see 30x P/E multiple as the most reasonable valuation for Apple, assuming results come in line with the most bullish expectations.
At 30x the high estimates for FY21 earnings, shares would be worth $133.50 per share. In other words, around 8.5% above from where the stock trades today. Not much to get excited about. However, while upside may be limited, downside from today’s prices is limited as well.
How so? In today’s near-zero interest rate enviornment, even more risk-averse investors need to be in equities to beat inflation. And, which stocks are most appealing to these types of investors? High-quality, blue-chip tier names like Apple.
Add in its potential to meet, or possibly beat, earnings projections, and it’s hard seeing shares falling far from today’s prices. That is to say, prices below where it’s traded since September (between $110 and $125 per share).
Don’t Expect Another Epic Move Higher for Apple
Sure, for some investors, a lower-risk, but lower-potential return opportunity like Apple stock doesn’t look so bad. But, for those wanting to buy it today, with the expectation shares perform as well in 2021 as they did in 2020, should look elsewhere.
Why? At today’s prices, valuation is already stretched. And, while shares could move a few dollars higher if earnings hit the top end of estimates, the price targets mentioned above may be more a stretch goal than an inevitability.
Bottom line: if you already own Apple, there’s no need to cash in your chips just yet. And, if you are a more risk-averse investor looking for blue-chip stocks, it may be worthwhile at today’s prices.
But, if you are an aggressive investor, this stock may no longer be your cup of tea. Unfortunately, AAPL stock is not likely to see another epic move higher.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
