Apple’s Massive Stock Price Run-Up In 2019: Future Implications

Despite its size, Apple Inc. (Nasdaq: AAPL) has had a remarkable year in the stock market. Year to date Apple’s stock price has risen approximately 70%. Though the price increase has been a boon for Apple investors, it should also be a cause for concern. The primary source of that concern is the fact that almost all the increase in Apple’s stock price has come from expansion of the P/E multiple, not improvements in the company’s fundamentals. The graph below shows that this year Apple’s P/E multiple, measured relative to the last twelve months of earnings, has risen from 13x to 22.4x – an increase of 72%. Furthermore, the graph demonstrates that Apple’s stock price and P/E multiple track each other closely. This visual impression is confirmed by statistical analysis. The correlation between the price and the P/E ratio is 0.88. 

apple's stock price

Apple valuation

At 22.4x Apple’s P/E is the highest it has been in the last decade. In this respect, it is worth remembering that the primary determinant of a company’s P/E ratio is the expected rate of growth in earnings and cash flow. Apple’s record P/E multiple implies the market is expecting faster growth than any time in the past ten years. Yet a plot of Apple’s year-by-year earnings as shown below does not indicate any sudden acceleration. Though Apple’s net income is bumpy, if anything its growth rate has declined over time. Of course, the market may be expecting a sudden new burst of growth, but that raises the question as to the possible source of such growth. Given the immense scale of the company and the maturity of its products, the new source of income would have to be large to have a significant impact on Apple’s growth rate.

apple's stock price

Apple has introduced new products. For instance, in November 2019, the company announced its entry into the video streaming market. While the announcement was exciting and attracted a lot of attention, how much can it be expected to move the needle of Apple’s earnings? To answer that question let’s look at a simple calculation. Apple TV+ is now available for monthly subscription fee of $4.99. Let’s assume the service is a hit and Apple is able to match the domestic subscriber count of Netflix, 60 million subscribers. Admittedly, this is a heroic assumption. With 60 million subscribers each paying $5 a month, Apple will collect an additional 3.6 billion of revenue annually. Given Apple’s revenues of $260 billion in fiscal 2019, this amounts to a 1.38% increase in revenues. 

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Dan Jackson 4 weeks ago Member's comment

Nice short call on $AAPL

Craig Newman 1 month ago Member's comment

This article says it all, short this bloated overbought stock No doubt #Apple is a great company but this is stupid, the upside spiral l of this market is going to hurt a lot of people $AAPL

Farah Kincaid 1 month ago Member's comment

What about share buybacks?