Drop Apple Stock, As Overvaluation Won't Survive ~5% On Treasuries

Oct. 28, 2023 8:22 AM ET Apple Inc. (AAPL)

Summary

• Apple's high valuation compared to its growth trajectory is puzzling, but its consistent earnings and quality justify a premium.
• Comparing Apple to a "safe-haven asset" like the U.S. government debt suggests that Apple's valuation may be benchmarked against the Treasury yield.
• With neutral growth prospects, potential risks, and rising Treasury yields, Apple's P/E ratio of 30x seems unsustainable. A rerating is likely imminent.

The article assesses the valuation of Apple Inc. (AAPL) stock and suggests that it may be overvalued based on comparisons with its growth prospects, quality of earnings, and rising Treasury yields. While Apple has maintained consistent earnings and a strong track record of revenue growth over the past decade, its growth trajectory doesn't justify its premium valuation when compared to tech giants like Microsoft, Nvidia, and Google.

Apple's earnings are predicted to remain relatively flat in 2023, with a modest growth rate estimated through 2025, which is not significantly higher than the S&P 500's growth rate. The article acknowledges that investors are often willing to pay more for stocks with predictable and well-moated earnings, and in this aspect, Apple excels. However, the author argues that Apple's valuation should not be immune to benchmark comparisons, especially concerning the rising Treasury yields.

In the past, Apple's earnings yield was considered attractive compared to U.S. treasuries with lower yields. Still, as Treasury yields have increased, Apple's relative attractiveness has declined. While Apple offers qualities of both quality and growth assets, the article contends that its growth prospects are neutral at best. Factors like slowing iPhone shipments and potential antitrust challenges pose risks to its future growth.

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