I Still Think Apple Stock is Too High

Stock (Symbol)

Apple (AAPL)

Stock Price


Data is as of
May 9, 2019
Expected to Report
Jul 29
Company Description
Apple’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. Source: Thomson Financial
Sharek’s Take
David SharekLast qtr with Apple (AAPL) at $171 I felt the stock was “looking like dead money right now”. Then the stock ran past $200 after I sold all the shares in my managed portfolios. But in the last two weeks the stock has fallen from over $210 to $186 a share. And I still think the stock has downside risk. Apple had some crappy stats and some good stats last qtr:

  • Total revenue declined 5% year-over-year. Product sales fell 9% while Services rose 16%.
  • Net income declined 16%, but since management bought back stock EPS declined just 10%.
  • iPhone revenue (54% of total Apple sales) declined 17% yoy.
  • Services revenue (20% of total revenue) increased 16%.
  • Mac sales (10% of sales) declined 5%.
  • Wearables (9% of sales) had 30% sales growth. Wearables include Apple Watch, AirPods and Beats products.
  • iPad revenue (8% of total revenue) grew 22%, the best growth rate in 6 years.

Services revenue Apple supporters give the opinion services revenue is more predictable, and since service revenue is becoming a bigger piece of the pie AAPL stock should hold a higher valuation (P/E) than it does now. And that’s a great point. But the Supreme Court just ruled owners can sue Apple for monopolistic behavior for not allowing other app sellers for the iPhone. If you can download an app for your iPhone at 50% off from a trusted source — another app store — would you do it? That would make apps a commodity service where the lowest price wins. So if you want to win, you take the lowest profit margin, which isn’t good for the stock.

The charts and tables used in this report are from May 9th (4 days ago) when the stock was $201. At the time the stock had a P/E of 18. Apple’s median annual P/E has been 16 the past two years (at a time when profits were rising, not they are declining). Apple has an Est. LTG of 13% per year, a yield of almost 2%. Profits are expected to decline 4% this fiscal year. I think a P/E of 15 is realistic, and that equates to a $172 stock. So even though the stock is down, I think Apple stock is still too high.

One Year Chart
This stock had a nice run in 2019, but the chart looks like Facebook’s and Amazon’s. Not the numbers, just the shape of the chart. That’s strange. That makes me think the stock’s move higher isn’t because it’s a great company, but because it’s a big part of the S&P 500 and the rising market lifted all the big stocks.

The Est. LTG of 13% per year is ok. AAPL is a conservative stock and it would be nice if profits could grow 13% a year. But look at the right side of this chart, Annual Profits haven’t grown consistently. Profits might not double between 2012 and 2019. That’s seven years. There are many companies doubling profits every 2-3 years. AAPL’s P/E was 15 last qtr. The stock seems high around $200.

Earnings Table
Last qtr AAPL delivered -10% profit growth on -5% sales growth. -5% sales growth for the 2nd straight qtr. Profits beat estimates of -13%, but that figure was slashed the qtr earlier so it wasn’t a clean beat.

Annual Profit Estimates got gashed last qtr and had a dead-cap-bounce this qtr. Nice to see annual estimates stabilize.

Qtrly profit Estimates are for -10%, -7%, 7% and 15% profit growth the next 4 qtrs. Increased tariffs from China might bring profit estimates lower and/or profits lower.

Fair Value
Notice in this table that profits are up ten-fold in ten years. The stock price is also up ten-fold. Stock growth followed profit growth.

My Fair Value increases this qtr from a P/E of 13 to a P/E of 15. I raised it because (1) the economy is strong thus the stock market is strong and that lifted the largest stocks in the S&P 500 and (2) profit estimates didn’t drop this qtr.

Bottom Line
Apple (AAPL) has had its ups-and-downs the past decade, but overall buy-and-hold investors have done well Still, this is a hardware stock and previous hardware stocks that fizzled out due to commoditization include Compaq,  Nokia and Dell.

Apple is now trying to transition into a more well-rounded company. The problem is the company doesn’t have a new catalyst as it did in the past. Some expect the Apple Watch to become the next catalyst when it can detect health issues. But if Samsung phones do that as well, health detection will be common in cell phones.

AAPL was sold from the Conservative Growth Portfolio and Growth Portfolio last qtr. The stock lacks certainty, consistency and growth opportunity.

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