Apple (NASDAQ: AAPL) has been on a tear. Apple stock recently hit a new all-time high, after growing 147% over the past five years.
But, now selling for 41 times earnings, the share certainly does not look cheap to me.
Could it be headed for a fall?
Or might there be more value here that means I ought to add the tech giant back into my portfolio ahead of this week’s upcoming quarterly results?
Proven business, long runway
As a business, there is a lot to like about Apple.
It operates in markets that are huge and likely to stay that way. It has developed a strong, premium brand and loyal installed user base that gives it significant pricing power. That is evident in its profit margins. Last year, Apple’s net profit margin was 24%.
Thanks to that installed user base, and the annoyance factor of switching providers, I think Apple has a long runway for growth still ahead of it.
That is about services and software as much (or more) as hardware. Apple’s focus on maintaining a small portfolio of products has enabled it to devote attention to monetising its user base through business lines such as financial services. Over time I expect that to keep growing.
A decade from now, I expect Apple to be a bigger and more profitable company than it is today.
What’s the right price for quality?
That is not guaranteed to happen, though.
Lots of cheaper brands with increasingly sophisticated products are nipping at Apple’s heels. Net income at the tech giant has fallen for the past two years in a row, though many analysts expect it to grow this year.
The company’s strength in some markets could also, paradoxically, be a risk. It makes it a more attractive target for regulators, as we have seen with other large US tech firms.
Meanwhile, AI poses a challenge. If Apple does not embrace it enough, it risks being left behind by its competitors. But if it pours vast sums of money into building its AI capabilities, the company’s profits could suffer.
So, what does that mean for valuation? In short, Apple stock looks too expensive to me considering the risks, even though there are lots of strengths to the business.
I’m not buying
On that basis, I have no plans to buy Apple stock at the moment.
Is it headed for a fall?
Not necessarily. Although I see it as overvalued, Apple has historically often commanded a price premium due to the high quality of its business. I think that is still justifiable.
Investors remain excited about the potential of everything from Apple Pay to the latest iPhone. In the second quarter, iPhone revenue grew by double digits, while services revenue hit a new all-time record high.
If there is no particularly bad news or a general pullback in tech valuations, I see no obvious immediate trigger for Apple stock to tumble. Still, the valuation is too stretched for my tastes. I will not be investing.
