Apple (NASDAQ:AAPL) launched four new iPhone 5G models, but the needle didn’t really move much as a result of the event. The fact is AAPL stock is probably overvalued at the present time. The stock may have to “grow” into its earnings for a while before there is much upside.
The shares trade for almost 31 times Apple’s 2021 forecast earnings per share (EPS), according to analyst data on Yahoo! Finance. And this assumes that those earnings rise by 19.4% next year. This is after rising only 9% this year, based on analysts’ estimates.
Moreover, AAPL stock is really at a historical peak price-to-earnings valuation.
AAPL Stock Valuation Issues
If you look at Morningstar’s record of Apple’s annual average P/E ratios, you can see this. The research provider reports that the average annual P/E multiple is only 17.75x for the past five years. And that includes this year’s mid-to-high 30x P/E.
So that implies that at today’s 31x forward earnings, the stock will either have to fall or it could languish a while.
For example, assuming that earnings grow by 20% for three years, the EPS in 2023 would reach $5.57 or so. Therefore, assuming AAPL stock doesn’t move much over that time, the P/E ratio would fall to 21x or so. This would be closer to its historical multiple.
And don’t be too skeptical of this scenario. It could easily happen.
But the truth is AAPL stock has performed quite well over the long term. There seems to be every good reason why this will continue.
For example, over the past five years, it is up 329%. That works out to an impressive average annual compound return of 33.8%.
Let’s hope that the company’s new 5G phones will help it continue that growth.
5G Won’t Matter Much To Most People
As Barron’s pointed in the days following the new product reveal, the biggest benefit from 5G and Apple’s new iPhone 12, is for higher latency speeds. This matters mostly for gamers — and gamers who use the iPhone (though, most play on consoles).
So what’s the big deal? The faster speed is not going to matter to most people who use their phone as a text, phone, internet access point-of-presence. And don’t forget — we aren’t commuting or traveling as much anymore. We are stuck at our home desks. That is not where 5G matters much.
The fact is that 5G without millimeter-wave networks is simply 4G “with a new name,” according to Craig Moffett, a telecom analyst with MoffettNathanson. But Verizon will deploy millimeter-wave 5G service only where large groups congregate, including business districts, stadiums, and campuses.
So, again, a mostly non-event for most people, including Apple users. But they are going to have to eventually upgrade anyway. That will help Apple, but the competition is getting more fierce.
Barron’s Eric Savitz also made the point that for right now there are no killer 5G dependent apps. “They are coming … they are coming,” say the proponents. I guess we will have to wait.
Here is the bottom line: 5G won’t matter much for the time being for most people. And that is not good news for AAPL stock.
What To Do With AAPL Stock
Here is a ray of hope for AAPL stock. Apple’s four-year average dividend yield is 0.37%. But the dividend yield today is higher at 0.69%. Therefore the stock has room to move higher so that its dividend yield will be lower, with the same dividend.
For example, Apple’s annual dividend is 82 cents per share. Therefore, at a dividend yield of 0.37%, AAPL stock should trade at $221.62 per share. This is the result of dividing 82 cents by 0.37%. It represents a potential gain of 86.2%.
Let’s assume that it takes two years for that to happen. That would put the average compounded return at 36.5% each year over the next two years. That is also close to its historical five-year return.
Therefore, even though AAPL stock is too high on a historical P/E basis, it is too low on an historical dividend yield basis. This means that most investors who already own the stock will likely want to continue to own the shares. For those looking to take a position, it might be worthwhile to wait for a bargain entry point first.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.