Apple Stock: Its Valuation Premium Is Deserved

I am neutral on Apple (AAPL) as it enjoys strong growth momentum, a lengthy growth runway, a powerful moat, and bullish sentiment from Wall Street analysts. That said, it looks pricey relative to its recent historical valuation multiples.

Apple is a global consumer electronics and innovative technology company. Its flagship product is its iPhone. It also sells personal computers, tablets, smart watches, and more. AAPL is also currently developing an electric vehicle, among other research and development projects.

With a massive cash balance and a wildly profitable business model, Apple has enormous financial clout, which it uses to return cash to shareholders and invest in its future.

Strengths

AAPL stock benefits from one of the most valuable brands in the world, and consumers love the company’s electronics products. This is because – in addition to having a reputation for reliability and longevity – they are very user friendly, are supported by fantastic customer support, are beautifully designed, and also bring with them a status symbol that is visible throughout the day via Apple’s iPhone and iWatch products.

When combined with the company’s massive global distribution network, economies of scale, and world-class workforce, Apple has a very wide moat that enables it to generate fantastic returns on invested capital.

Recent Results

Apple recently announced its fiscal 2022 first-quarter results, which included record revenues of $123.95 billion (up 11.2% year over year) and quarterly earnings per diluted share of $2.10. The company also returned an impressive $27 billion to its shareholders during the quarter via dividends and buybacks, as it continues to drive towards reaching a net cash neutral position over time. 

Valuation Metrics

AAPL stock looks richly valued here, as it trades above its historical valuation multiple averages on a forward enterprise-value-to-EBITDA ratio and forward price-to-normalized-earnings basis. Its forward EV/EBITDA ratio is 18.9 times compared to its historical average of 14.2 times, and its forward price/normalized-earnings ratio is 25.4 times compared to its historical average of 20.9 times.

Meanwhile, for Fiscal 2022, analysts expect revenue to increase by 8.2% and normalized earnings per share to increase by 9.7%.

Wall Street’s Take

According to Wall Street analysts, AAPL earns a Strong Buy consensus rating based on 24 Buys, five Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Apple price target of $193.36 puts the upside potential at 22.2%.

Summary and Conclusions

Apple enjoys massive competitive advantages and is leveraging them to enrich shareholders through capital returns today while simultaneously investing aggressively in its future. It is arguably the strongest company in the world and therefore is one of the safest long-term investments that investors can make.

As a result, its valuation premium is somewhat deserved, and Wall Street analysts are overwhelmingly bullish on the stock with a consensus price target that implies strong upside potential over the next year.

That said, the stock price does not look compelling here as the valuation multiples are above historical averages. As a result, investors might want to wait for a pullback in the stock price before adding shares.

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