Commenting on Apple’s financials is like complaining after someone just bowled a 300. They really are perfect.
So, now that I’ve made that disclaimer, I’m going to comment on Apple’s financials. :)
Well, not so much their financials… as much as their valuation as determined by their financials. Because I think they suggests Apple has overheated.
A long time ago, the rule was your P/E should be about your growth rate. Primarily earnings, but people applied this to revenue growth, too, given that earnings was sometimes impacted by operating initiatives.
So, if you were growing earnings around 10% a year… or revenues around 10% a year… you should have about a 10 P/E.
Like everything these days, that’s also been inflated. Or ignored. Or convoluted due to a variety of “financial engineering” things. People rationalize inflating via the term, “multiple expansion.” But regardless of creative justification, it’s still a grounding rule-of-thumb that offers some perspective.
How does all this apply to Apple?
AAPL’s P/E is just over 23.
Over the last few years, AAPL’s average earnings growth was about 14.5%. AAPL’s average revenue growth was about 7%.
See the problem?
On either measure, AAPL is overvalued by a good chunk. Sticking with just earnings (the higher percentage), that suggests AAPL should be trading around $200 per share.
But it gets worse.
Pre-pandemic, Apple’s Q1 earnings were up 19% comparing like quarters. (Revs were up 9%.) Still below P/E, but at least you can see that earnings growth was within spitting distance of it.
Post-pandemic, Apple’s Q2 earnings were up 4%. (Revs essentially flat.) Now that’s way below P/E.
But here’s the bottomline: The combined earnings growth of 14% for the first half of the fiscal year doesn’t account for the fact the next few quarters are going to look more like Q2 than Q1. Due to the pandemic, earnings and revenue growth at Apple HAVE SLOWED. For real.
And my point? The shares are priced like nothing’s happened… for an immediate snapback… but the numbers are already saying this isn’t happening.
Heck, even the company said this isn’t happening on their conference call.
Using my old P/E guideline, AAPL could theoretically be valued around $100 per share.
Now, before anyone thinks I’m a stock-hating crazy or something, I don’t believe that will happen. Apple is one of the most phenomenal businesses on the planet. They are so big — and so well managed — and have so many levers — that of course they would make adjustments to their business before that happened.
For example, they could cut a lot of costs. Duh.
Or, if their hardware business ever sucks too much wind, they could just spin-out their services businesses, which continues to grow impressively through this crisis.
You might say that they would never break up their eco-system… but, believe me, it’s a lot more common in business than you might think. Usually goes under the term “monopoly.”
You might also say that Apple is just too big to have such a puny valuation. But there are lots of HUGE companies with puny valuations. For example, massive distributors with tiny earnings.
So, while I’m not saying AAPL is going to $100, the thought that it theoretically could gives me comfort saying AAPL — in the short term — should be trading closer to $200 than $300.
Royal Blog 