When it comes to Apple (NASDAQ:AAPL), investors face a conundrum. Is it time to steer clear of this tech giant’s overpriced stock, or are there upcoming innovations that could justify a long position? Let’s dive into the rational, fact-based analysis to provide a fresh perspective for those holding or considering AAPL in their portfolio.
The Case for Apple
Amid the current share price, AAPL presents itself as an investment with limited potential to outperform in the near future. Though it is priced as a growth stock, its fundamental value resembles that of a traditional company.
On the flip side, shorting AAPL warrants caution due to passive flows and other dynamics that influence its direction, often overriding underlying business performance.
Taking all into account, my recommendation is to steer clear of AAPL without resorting to a short position.
Now, let’s delve into the justification behind this stance.
Unraveling the Multiples
Currently, AAPL trades at a P/E multiple of 29x, signaling the market’s view of it as a value stock.
One might argue that P/E is not the be-all and end-all, suggesting a focus on metrics that capture AAPL’s cash generation prowess.
However, evaluating AAPL’s valuation through the P/CF metric yields strikingly similar conclusions, despite the company not being capital-intensive.
From a P/CF perspective, AAPL trades well above its 10-year historical norm and near all-time highs, despite significant SOFR inflation, which theoretically should dampen valuations.
A Seeking Alpha valuation table further highlights AAPL’s unattractive multiples, exerting pressure on the company to validate them for investors to realize substantial returns.
For instance, a P/E of 29x implies investors would need to wait nearly 29 years to recoup their investment, holding all else constant. This lofty multiple could be justified by potential growth, but AAPL’s dwindling cash flows tell a different story.
Waning Cash Flows
With a P/E of 29x, one would expect robust top-line growth. However, AAPL’s sales have been nearly stagnant since March 2021, with a slight dip at the EBIT level.
The latest results indicate AAPL’s struggle to maintain its historical financial performance levels. The key product categories, including iPhone, iPad, and Mac, experienced a decline in September 2023 compared to the same period in 2022, with only the services segment showing positive momentum.
Considering the soaring inflation since March 2021, one would anticipate substantial revenue growth in this period. However, AAPL’s lackluster single-digit sales growth, when adjusted for inflation, likely results in negative real growth.
This underwhelming performance, combined with a near 10-year high P/E of 29x, fails to compensate investors adequately.
Questionable Growth Prospects
The debate on AAPL’s future growth prospects is highly subjective. Some investors believe that ventures like VR, Apple car, and untapped platform monetization opportunities could propel AAPL’s market cap to new heights. Others argue that these endeavors might drain cash without justifying the current multiple.
In light of AAPL’s tepid cash flows and unimpressive sales growth, the question remains – can forthcoming innovations truly justify the lofty multiples?
