The largest company in the world by market capitalization Apple (AAPL) for various reasons remains the leader among many investors. For those who invest in passive funds such as ETFs, Apple will indirectly become the largest participant in most market cap-weighted ETFs. For active investors, Apple’s growth in long-term capital gains has often organically made the giant the largest position.
This $ 2.1 trillion company has created one of the greatest consumer goods ecosystems of all time. The company’s closed ecosystem and high customer loyalty provide an impressive moat for investors. Apple has leveraged its growing ecosystem over time to provide steadily growing cash flows to support its valuation. (See Apple Stock Analysis at TipRanks)
However, there are reasons to be careful with Apple right now. Recently, the company has seen that some downward impulse has materialized recently, and there is certainly reason to believe that this impetus may continue in the future.
This is why investors need to be careful with Apple right now.
Apple’s value grows several times faster than its profits
The quality of returns matters to investors. Indeed, today’s overpriced market is filled with companies with questionable profit growth in terms of sustainability. The fact that Apple is capable of such consistent growth, given its size, makes the company’s cash flows more valuable to investors in relative terms.
However, when looking at the company’s valuation multiples relative to its earnings growth, the rise in Apple’s stock value is largely the result of exponential growth rather than underlying fundamentals.
This is indicated by a number of recent high quality analyzes. Indeed, it is now difficult to justify paying twice the relative value of its own shares. However, we are in this market.
Accordingly, some have suggested that the entire market has shifted towards consistently higher valuation multiples. After all, these multiples are a function of the risk-free rate. As bond yields continue to hover around zero, investors are simply willing to settle for above-average multiples.
Others suggest that valuation multiples revert to their long-term average over time. If that happened, Apple would most likely have serious flaws.
The company will need to continue to innovate over the long term
Apple’s success has been tied to its ability to provide consumers with the products and features they want. The completely redesigned sector lineup is impressive. Whether it’s the latest iPhone, iPad or Macbook – many people around the world keep updating every year.
However, the unfortunate reality of consumer discretionary space is that it is relatively unforgiving for companies. If consumers don’t see the “need” for this upgrade, sales growth could slow.
Apple bears have been talking about this for years. Despite these concerns, the company seems to have found a way to continually create the products and services that its users want. In this context, it’s hard to argue with Apple’s track record.
However, we look forward to reasons for caution. Investors may start clamoring for Apple Car (which has been talked about for some time) or some groundbreaking breakthrough to see the long-term value of owning that company. Other investors have called for more diversified revenue streams (iPhones still account for 54% of the company’s total revenue).
Investor fatigue is real and is starting to take its toll on fast-growing markets. Many investors will benefit from being patient in this environment, even when it comes to the largest companies like Apple.
What analysts say about AAPL stock
TipRanks analysts’ consensus forecast is that AAPL stock is considered moderate. Of the 26 analysts’ ratings, there are 19 “buy” recommendations, 5 “hold” recommendations, and 2 “sell” recommendations.
In terms of price targets, Apple analysts average price target is $ 157.58. The target price for analysts ranges from $ 90 per share to $ 185 per share.
Indeed, Apple shares have repeatedly corrected by 40% or more over the years. Such a move in the short term remains unlikely. As long as interest rates remain low and investors have few other options, big companies like Apple will be fine.
However, if inflation turns out to be structural or if some macroeconomic event occurs in the market, Apple’s estimate may need to be revalued.
Right now, there doesn’t seem to be anything to worry about with Apple stock. It has dropped about 10% from its all-time high and many think this is a great discount. Accordingly, investors could get FOMO again and push Apple’s stock price to new all-time highs.
However, in this market, there is always room for patient investors to take advantage of the lack of momentum for a given stock. Midway at Apple today is not a bad idea. If it falls, it will be possible to buy more shares at a better price. If it goes up, the specified investor will still get most of the profit.
Disclosure: Chris McDonald did not hold any positions in the shares mentioned in this article at the time of publication.
Disclaimer: The information contained in this document is for informational purposes only. Nothing in this article should be taken as a call to buy or sell securities.