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Apple Stock is Insanely Overvalued Based on This Key Metric

Last Updated September 23, 2020 1:27 PM
Joseph Young
Last Updated September 23, 2020 1:27 PM
  • Apple stock’s PE ratio has doubled in the past 12 months.
  • Investors are confident in the firm’s expansion into new markets and popularity of new products.
  • Analysts still see a rally in the short-term despite criticism of overvaluation.

The Apple stock (NASDAQ: AAPL) closed at $300.35 officially on Thursday, bringing the total valuation of the company to $1.33 trillion. But, data shows earnings remained flat while the stock doubled in the past year.

The price to earnings ratio of Apple increased from around 12 in January 2019 to 25 by January 2020, by more than two-fold in 12 months.

Apple earnings flat while stock soars: what’s behind it?

Since last year, the PE ratio of Apple soared significantly and it shows that the stock is rising mostly based on sentiment.

Apple PE
Profits to earnings ratio of Apple stock doubles in 12 months | Source: YCHARTS

Investors are becoming increasingly confident in the long-term trend of Apple and the company’s strategy to deal with the plateauing smartphone market.

The iPhone 11 was a home run in regard to popularity and demand in key markets such as the U.S. and China. Despite Apple boosting production to meet with unexpectedly large demand, early estimates put iPhone sales in 2019 to be at around 180 million. 

That is a substantially lower number compared to previous years in 2017 and 2018. From January to December 2018, Apple shipped 208 million devices. 

Hence, almost a two-fold increase in the stock price of Apple in 2019 with flat earnings and mediocre iPhone sales considering figures from the past two years indicates the stock is overvalued.

But, it also shows that investors highly rate Apple’s diversification of its products and operations. In particular, the company’s entrance into the audio market has investors excited for 2020.

As said by Pogo Financial CEO Adam Ludwin, audio was the single most important consumer trend in 2019. 

He said:

Surprise: audio was the most important consumer tech trend in 2019. Audio memes become a thing (Tik Tok); AirPods, podcasts, and audiobooks all go to another level; VR’s killer app turns out to be a music/rhythm game (Beat Saber).

Apple has positioned well to target the rapidly expanding audio market. The production of AirPods expanded by nearly 100% in late 2019.

Lambda School growth head Jeff Morris said that last year was “insane” for AirPods, giving the Apple stock a much needed boost prior to the new year.

Source: Twitter 

How much further can it go?

Some analysts, like Wedbush’s Dan Ives, see the market cap of Apple hitting $2 trillion in the next 24 months.

In the short-term, Ives said last month that the Apple stock could rise to as high as $350 . That would mean almost a 20% move until the year’s end.

To put it simply, Apple showed that it can survive slowing growth of the smartphone market and that it can aggressively target new markets like audio and streaming. 

The company’s willingness and ability to expand beyond its core products and operations continue to lead investors to become optimistic in the medium to long-term trend of the stock.

A $2 trillion market cap would still require sustained momentum in the U.S. stock market in the upcoming 11 months, and that remains outside of Apple’s control.

Assuming that the low-interest rate and relaxed financial conditions keep investors happy throughout the year, Apple may still have significant room for additional growth.