Is Apple overpriced even at a valuation of $2Trillion? If you’ve been watching the recovery of tech stock prices in the second calendar quarter of 2020, it is a reasonable question to ask if Apple is overpriced. Can a single company really be worth $2 Trillion?
Well, the first thing to say is given inflation, the value of money decreases over time so to buy the same thing 100 years ago would probably have cost less in absolute dollar terms than today (all things being equal) so the absolute value of Apple is less interesting than looking at the (stock) price of Apple relative to how much profits (Earnings Per Share) it generates – this is called the P/E (Price Earnings ratio). Typically a P/E ratio of a company in the 8-10 range is considered not too overblown (that being said, there are many other factors that may or may not make the stock a good investment or not though). Apple in the middle of 2020 was trading at around a PE ratio of 28 which suggests it could be overpriced…
But to understand if it is overpriced, you need to look at the future growth potential of the stock and in this regard, Apple has the opportunity to grow in multiple segments, 5G, it still has a relatively small market share of the portable computer market and is introducing new lower-priced versions of its aspirational iPhone. The other thing to consider is if the other competitors who operate in a similar area (e.g. FAAMG an abbreviation created by Goldman Sachs for five top-performing tech stocks: Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google) here you can see the P/E ratio looks high but Enterprise Value to Free Cash Flow (which compares the total valuation of the company with its ability to create cash flow) shows Apple to be the lowest by this metric.
So I think you need to look beyond stock price and big valuation numbers to understand if a stock is overpriced or not. In my personal opinion, Apple has strong future opportunities to generate more profit.
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