Apple: Buy, Sell or Hold?

Apple (AAPL) has delivered incredible returns for shareholders thus far this year, with a 60% return year-to-date, nearly tripling the performance of the Nasdaq Composite (QQQ). The catalyst for this performance has been continued double-digit growth in Products and Services, with a record quarter for Services of $13.2 billion…

This is even though Apple suffered from store closures across many geographies in the quarter, which weighed on Apple Watch sales, which consumers typically prefer to try before buying.

Regardless of this minor headwind, sales came in at $59.7 billion in fiscal Q3, up 11% year-over-year for the strongest quarter in sales growth since Q4 2018 (11% growth). However, while the fundamental story for Apple is rosier than ever, I believe a lot is priced in at current levels, with the stock trading at one of its highest multiples in history. Let’s take a closer look at the value proposition below:

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Beginning with Apple’s annual earnings per share, the company’s growth has been nothing short of exceptional for a trillion-dollar company. Based on current estimates, annual EPS is expected to grow by 9%~ year-over-year in FY2020, though the tech juggernaut is up against relatively easy comps with annual EPS down 1% last year.

If we look ahead to FY2021, we should see growth accelerate in a big way, with annual EPS expected to grow by more than 18%, and an earnings growth rate that most large-cap companies have a hard time achieving, let alone one of the top-5 market largest companies in the world.

Given that the best-performing stocks on a 12-month and 24-month forward return basis typically have 17% annual EPS growth or higher, investors should be encouraged that Apple fits this bill as it bodes well for the stock long-term.

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Unfortunately, while the growth is exceptional, investors are paying a lot today for that growth. As we can see in the chart above of Apple’s price to sales ratio, the stock only traded above 7x price to sales at one point in the past 30 years, and we’re currently nearly 10% above the prior peak at 7.55x.

Meanwhile, the company’s revenue growth rate is actually lower than where we stood in late 2007 when AAPL hit this valuation, suggesting that investors are paying a higher valuation for lower growth (11% revenue growth vs. 39% in 2007). This is not ideal, as there is no margin of safety baked into the stock whatsoever here.

While there’s no reason to believe that this time will play out the same as last time as Apple had to contend with a secular bear market for the S&P-500, it’s worth noting that…

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