Dangerous optimism

Apple´s stock price is soaring, be careful not to be carried away

Everything seems to fall in place for Apple right now: The new Apple credit card doubled Apple Pay customers within 6 months, new apple watch and air pods are well received and bought by the millions and trade tensions between DC and Beijing seem to be easing – important for a US-company with around 40 billion in sales and a significant supplier base in China. No wonder, Apple stock is up. Shareholders can celebrate 65 percent performance year to date.

But here is a short reminder, what investors experienced throughout the last years:

What a wild ride for a mega-cap: Apple lost about a third in value within 12 months in 2015/2016 only to gain 150 percent throughout the next 2,5 years. Then there was panic: Shares dropped almost 40 percent in the last quarter of 2018 – and recovered with a spectacular rally. Sure, the business of Apple had some ups and downs during that time. But it´s fair to say, that sentiment was the driving force for most of the swings in the last couple of years. After all Apple still is the iPhone-company and adds services revenues as planned and laid out years ago.

I have been following the sentiment around Apple for a long time and it seems to me, we are close to a point where all the good news is baked into the price and the valuation doesn’t leave that much room for negative surprises. The PE on estimated earnings is hovering around 20 – more than double what investors were willing to pay in the low of 2016. Sure, Apple has demonstrated it can turn existing customers into buyers of new gadgets and services, and investors pay up for that kind of stable business model around the Apple ecosystem. But companies with similar valuations tend to have way higher growth rates.

Don’t get me wrong: Apple is in formidable shape and has executed well in services – especially in healthcare (Apple watch) and financial services (Apple pay), leveraging a loyal customer base. But sometimes too many good news makes investors believe, it will only go on like this forever.

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