Does Apple’s Valuation Justify Its YTD Stock Gains?

Apple’s valuation

Earlier in this series, we looked at analysts’ consensus ratings and target prices for Apple (AAPL). Most analysts still seem cautious about the company, as the negative trend in its Product segment’s sales continues to be of major concern.

As of February 15, AAPL has risen 8.0% since witnessing a 30.1% fall in the quarter that ended in December 2018. Let’s find out how Apple’s valuation multiples are trending.

Does Apple’s Valuation Justify Its YTD Stock Gains?

Apple’s valuation multiples

As of February 15, Apple’s forward PE multiple is 14.3x, much higher than its forward PE multiple of 12.5x about a month ago. These forward PE multiples are calculated based on Wall Street analysts’ estimates for the company’s earnings for the next 12 months. In fiscal 2019, Apple’s EPS are expected to fall 4.3% YoY (year-over-year). In the previous couple of fiscal years, the company has managed to report double-digit positive adjusted earnings growth.

As of the same date, the forward PE multiples of other tech giants (XLK) Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) are 22.7x, 56.0x, and 23.4x, respectively.

Popular American electric carmaker Tesla’s (TSLA) forward PE multiple is 50.6x, much higher than those of Apple, Microsoft, and Alphabet.

What could affect valuation?

In the quarter that ended in December 2018, Apple managed to beat analysts’ earnings and revenue estimates by a narrow margin. While Apple’s plan to strengthen its Services segment could yield impressive returns in the long term, the company could continue to face challenges due to its deteriorating Product segment sales in the short to medium term.

In the near term, Apple needs to focus more on reviving its Product segment sales, as it can’t solely rely on its Services segment at the moment due to services’ very low contribution to its overall sales. A consistent drop in Apple’s product sales, especially in iPhones, is likely to hurt its future earnings estimates, which could drive its valuation multiples lower.