If you’re a loyal Apple shareholder, your faith in its stock to keep rocking — despite the gigantic size and maturity of the iPhone maker — has paid off thanks to the phenomenal 300% takeoff since the pandemic began. . But if you’re thinking of buying Apple stock Today in the hope that it will continue to climb at anything resembling the same rate, forget it. In fact, the party is probably over and the hangover is in sight. Apple now stands as a textbook case of a stock so richly valued that its future returns are likely to prove extremely poor.
That may be a hard conclusion to accept on July 4, when the business media and Wall Street analysts join the voices in hailing Apple’s latest coup. On Friday, June 30, Apple shares ended the trading day at a total market capitalization of over $3 trillion, the first time a US company has reached this milestone. The Cupertino colossus had hit the ‘big 3’ mark in intraday trading in January 2022, only to fall below at market close, then crashed for the rest of last year. But in 2023, Apple shares went wild 49%, adding almost exactly $1 trillion in value, or 40% of the $2.5 trillion Microsoft is worth today.
Apple Stock Forecast
Simply put, Apple faces two major hurdles to make significant gains in the future. Both stem from the trend that has enriched investors so much so far: a gigantic increase in its valuation that likely far exceeds the biggest surge in earnings in capital markets history. The result: Apple is now selling at an unsustainable multiple on top of profits that are likely unrepeatable as well. Since the close of its 2015 to 2020 fiscal years (ending September 30), Apple has increased earnings per share by 42% overall, or a modest 7.3% annually, to $3.28. Then, as the hunger for its PCs, phones, services and other deals that fueled the work-from-home revolution exploded, its EPS staged a moonshot, soaring to $6.15 in March 2022, an 88% gain in just six quarters, twice the increase in the five years to September 2020.
From late 2009 until the outbreak of COVID-19, Apple’s median price-to-earnings ratio hovered around 16. But on June 30, the day Apple broke the $3 trillion mark, its PE reached 32.9, meaning shareholders are now receiving less than half. earnings dollars for every $100 they pay for stocks alongside the nine-year pre-pandemic norm. And the markets have put that extra premium on GAAP earnings that have gone from the $50 billion where they were stuck in the mid to late 2010s to $100 billion in fiscal year 2022. In other words , investors attributed the lavish PE because they expect Apple’s earnings to grow rapidly even after nearly doubling in a few quarters. And that’s the catch.
The two problems: Dividends and buybacks are less profitable at these prices, and the PE will likely fall
Today, Apple’s official dividend yield is just 0.58%. Meanwhile, it has funneled more than 90% of its GAAP earnings into buyouts over the past two years; in fact, total redemptions plus dividends slightly exceed total earnings. For this analysis, we’ll assume that Apple simply attributes all of its reported earnings to a combination of the two categories. The problem: At a PE of 33, returning 100% of earnings to shareholders through dividends and buybacks provides a total return of only 3%. This is a stark contrast to the period of 2017 and 2018, when Apple’s PE averaged 16. Then devoting all profits to dividends and buybacks promised a return of 6.25%, more than the double today’s figure (that’s Apple’s “dividend yield plus redemptions”, or the inverse of the multiple of 16).
Let’s assume that investors will want 10% annual gains over the next decade as compensation for owning this very high priced, and therefore quite risky, stock. If Apple’s PE remained constant at 33, it could achieve this by growing earnings by 7% per year, inflation included – that’s the combined 3% dividend and buyout yield plus 7% annual upfront on profits. But the chances that the multiple can remain in this rarefied domain are nil. Let’s estimate a sustainable PE for Apple. A useful formula predicts that its PE will return to halfway to the all-time high of 16 before the pandemic. The midpoint between its former multiple of 16 and the current 33 is around 24. Keep in mind that 24 is still a terrific number that would incorporate expectations of robust earnings growth for anyone buying in 2033. We take so a better case scenario.
A declining PE emphasizes epic earnings growth that is unachievable
A drop in Apple’s multiple from 33 to 24 by mid-2033 would require a 3% annual decrease. Each year, his PE would be 97% of that of the previous year, ending at 24 at the end of our window. (A multiple 3% lower this year than last year means the stock price will fall by the same 3% if EPS remains stable.) The headwind of the 3% annual drop in the multiple would completely offset the 3% upward push in dividends and redemptions. As a result, all of the 10% return expected by investors should come from increased earnings.
The key question is, can Apple really grow its GAAP net profit by 10% on a consistent basis as the numbers needed grow ever more gigantic? Based on the obvious math, the answer would be “not a chance”. Dealing with bogeys requires increasing earnings by $10 billion in fiscal year 2023 and $15 billion in 2027. The law of large numbers becomes a significant obstacle. In five years, Apple should increase its profits by the equivalent of what Procter & Gamble, the 17th biggest earner on the fortune 500 list that year, made in 2022.
In fact, Apple faces a thorny test to dramatically increase its profits at all, even less at 10% per year. Based on its last four quarters, net income fell from $100 billion in fiscal 2022 to $95 billion, raising fears that the nearly 90% pandemic-fueled surge could be partly a one-off phenomenon. Keep in mind that Apple’s revenue in fiscal year 2022 was already 28% and 70% higher respectively than the other two biggest winners of the outbreak, and the second and third highest earners. of fortune 500 list, Microsoft and Alphabet.
The feat of hitting $3 trillion that led Wall Street to predict other big returns to come really bodes otherwise. It sets the bar for what Apple needs to accomplish far beyond even the capabilities of this extraordinary money-dispenser. Apple remains a big company. It’s anything but a good buy.
This story was originally featured on Fortune.com
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