Just don’t lump Apple (AAPL) into the often heated tech bubble debate, argues Wall Street power player Rob Arnott — known for deeply analytical takes on markets and stocks — founded Research Affiliates in 2002 and it has about $145 billion in assets under management.
“You look at Apple. It’s expensive. But is it a bubble? No no. You can use aggressive [financial] assumptions. They don’t have to be implausible assumptions to justify today’s price, and there’s lots of buyers who buy it based on that kind of analysis,” Arnott said on Yahoo Finance Live.
At first blush, Arnott’s comments on Apple’s valuation are perhaps slightly off the mark.
The tech giant’s stock is up 60%, embarrassing the Dow Jones Industrial Average’s paltry 5% gain (of which Apple is a component). During that stretch, the Nasdaq Composite has tacked on 40%. Apple is the second best-performer from the FAANG [Facebook, Apple, Amazon, Netflix and Google] cohort over the last year, underperforming only Amazon’s 68% advance.
Apple is among the most owned stocks in the entire stock market.
Investors have been keen on Apple for a multitude of reasons, including enthusiasm around new 5G iPhones, strong demand for Macs for those working at home amidst the pandemic and attractive levels of cash on the balance sheet. More recently, the stock has been bid up on speculation of the introduction of an Apple electric car within five years.
But take a step back, and Arnott may be dead right to say Apple’s stock is not detached from a realistic outlook on the future of the business (excluding an Apple Car). If anything, the stock may continue to be a bargain.
While Apple’s stock trades at a premium relative to its five-year average price-to-earnings multiple, at 32 times estimated earnings the stock trades well below comparable multiples for Amazon (58 times) and Netflix (57 times). And of course, Apple shares trade below the 204 times forward price-to-earnings multiple on electric vehicle favorite Tesla (TSLA).
An argument could be made that Apple’s exposure to 5G’s rollout, long-term work-from-home trends (and the need for more tech gear refresh cycles) and it’s enormous cash pile makes the stock silly cheap relative to some of the aforementioned names in tech.
Even on a stand-alone basis, Apple’s stock still looks like a bargain. Given the strong tailwinds driving Apple’s business, a case could be made that Apple’s current forward P/E multiple should be more around 35 times and that earnings estimates for the fiscal year ended September 2022 of $4.32 a share are too low. Apply that 35 times multiple to an estimate of $4.50 a share (Street high is $5.07 a share, per Bloomberg data), and it yields a fair value on Apple’s stock of about $158.
Apple’s stock currently trades at $127. Cheap, say the numbers.
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