However, questions about just how viable valuations are right now are present in the market. Apple is not immune to these discussions. Apple stock, like its growth peers, has benefited from multiple expansion to a much larger degree than earnings growth.
Is this sustainable? Well, in this era of low interest rates, perhaps. However, rich valuations certainly have investors in all stocks — even the best ones — concerned.
I’m bullish, on the stock. (See AAPL stock charts on TipRanks)
Multiple Expansion Not Exclusive to Apple
Interestingly, Apple’s price-to-earnings ratio has increased significantly, from 10 times earnings a decade ago, to 30 times at present. Indeed, there are various factors that can be attributed to the surge in Apple’s stock valuation.
First and foremost, interest rate cuts have driven a significant portion of the valuation increase high-growth stocks have seen of late. As interest rates decline, the relative value of equities (particularly those with higher growth rates) increases. Investors discounting future cash flows will note that these cash flows become more valuable as alternatives (bonds and other alternative investments) become less attractive.
Accordingly, capital flows into equities have been brisk this past year. Money essentially has nowhere else to flow. Given Apple’s size, and leading position in various ETFs and index funds, capital inflows into Apple stock have been very beneficial for shareholders.
Thus, the larger the company, the bigger the benefit of monetary policy in recent years. Those betting on the ability for mega-caps such as Apple to see multiple expansion have been proven right.
Of course, what goes up tends to come back down (or at least regress). Accordingly, some investors are rightly concerned — not necessarily with Apple’s valuation, but with the broader valuation multiple of the market right now.
Is Apple a Suitable Pick in this Environment?
Finding undervalued stocks is becoming increasingly difficult these days. Indeed, by many metrics, Apple stock certainly isn’t cheap.
However, making the argument this stock is unreasonably overvalued is difficult. Apple’s earnings quality is among the best of its peers, and of any company, really. Apple’s core product line, its overall brand, and customer loyalty provide a moat (or durable competitive advantage) few other companies have.
Accordingly, many investors want to stick with the best-quality companies, with the highest-quality earnings. Apple’s growth profile isn’t necessarily superior to many of its hyper-growth peers. However, this company’s balance sheet and business model are insulated to a degree many of Apple’s tech peers aren’t.
Accordingly, the question remains as to whether Apple can grow into its valuation. Currently, it appears investors think the answer is yes. There remains a lot of bullish sentiment in the market right now in this regard. Indeed, Apple’s robust earnings growth paints a rosy picture for those looking for growth exposure today.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, Apple stock is a Strong Buy. Out of 24 analyst ratings, there are 18 Buy recommendations and six Hold recommendations.
The average AAPL price target is $166.64. The analyst price targets range from a high of $185 per share, to a low of $132 per share.
Apple stock is more expensive than the market, and its comparable peers, at the moment. However, Apple’s revenue growth seems to be at par with its stock price. Investors also seem to be bullish about Apple’s future cash flow growth prospects.
This company is truly world-class in many ways. Indeed, despite the overvalued nature of the market, it appears investors are likely to gravitate toward quality.
In this regard, Apple ought to be viewed as one of the best long-term growth stocks in the market right now.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article
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