Is Apple stock now far too overvalued?

Apple stock has continued to soar in recent years, reaching a $3trn valuation last week. Is it now far too expensive for me to consider buying?

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Last week, Apple (NASDAQ: AAPL) became the first company to reach a $3trn valuation. While Apple stock has since slipped back slightly, it remains more expensive than the whole of the FTSE 100 combined. This ascendancy has mainly been due to a series of excellent results, as profits have been able to increase year-on-year. But is this tech stock now in a bubble waiting to burst or has it got further upside potential that I could take advantage of?

Recent results

Apple’s latest annual results clearly demonstrate why it’s the most valuable company in the world. Indeed, net sales reached $365bn, a 33% increase from last year. The rise in operating income was even more impressive, nearly reaching $109bn for the year. This is a 64% increase year-on-year. Therefore, there are clearly signs that growth is continuing at a rapid pace.

Such great results have also allowed Apple to return large amounts of money to shareholders through dividends and share buybacks. As the dividend only yields 0.5%, the main focus is on the share buyback programme. In fact, in the year ending September 25, Apple had made around $86bn of share repurchases, 18.5% more than the previous year. This has the effect of increasing the ownership percentage of each individual shareholder and has therefore been a key reason why Apple stock has climbed so much. There also seems no reason why this share buyback programme will stop, meaning that the share price may be able to climb further.

A valuation perspective

Despite these excellent results, there is no doubt that Apple stock is still expensive. This can be demonstrated by several different valuation metrics. For one, it trades on a price-to-sales ratio of around 8. By comparison, Amazon, another tech company that has seen incredible growth, trades at a price-to-sales ratio of under 4. Apple also has a price-to-book ratio of around 40, while Amazon trades at a price-to-book ratio of just 14. This is partly because Apple has issued a lot of debt for growth over the past few years and has used cash to buy back shares. While this is not necessarily bad, it does show that Apple stock certainly has a premium valuation in comparison to other companies.

Even so, from a price-to-earnings perspective, the current Apple stock valuation looks slightly more reasonable. In fact, in the most recent results, annual earnings-per-share came to $5.67, giving Apple a P/E ratio of around 30. This is around the average P/E ratio for the S&P 500. Considering the incredible growth of Apple, it may, therefore, not be as expensive as it first seems.

What am I doing with Apple stock?

Overall, there is no doubt that Apple trades at a premium valuation, albeit that its P/E ratio is more reasonable. But to buy the best companies in the world, it is often necessary to pay this premium. The company also has several growth plans for the next few years, including the launch of an augmented reality and virtual reality headset and a possible entry into the electric vehicle market. Therefore, I think growth is only going to continue, and I’m willing to pay a premium for the shares as a result. This is a stock I’m very tempted to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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