In recent years, Apple (AAPL) bulls have argued that the company is morphing from a seller of technology hardware to a software and services business, which should result in a meaningful increase in the earnings multiple of the shares. I was never really able to buy into that framework because sales of the iPhone were north of 60% of Apple's total business and services was stuck in the low double digits. Getting hardware from 90% down to 80% or even 75% of the company didn't seem like enough of a shift to warrant P/E expansion from the mid teens to the mid 20's, but plenty of folks firmly believed that Apple should have the same multiple as Starbucks or Coca Cola.
Those bulls have been waiting patiently and in recent months the value of their holdings has surged. During Apple's 2019 fiscal year (which ran from October 2018 through September 2019) the company's stock price fell from $226 to $224. In lockstep, the company's GAAP earnings per share fell by the same amount (from $11.91 to $11.89). During those 12 months, the stock's P/E ratio was (obviously) stable and it was clear that the days of P/E's in the 10-12x range were long gone. With slowing revenue and earnings and a reasonable valuation, I held no position in the shares.
Oh what a difference four months makes (evidently). Apple stock since September 30th has been on a tear, making a new high today at just shy of $320 per share. That is a gain of more than 40% in about 16 weeks. What on earth is going on? Well, the multiple expansion thesis is playing out, and fast, even though there seems to be minimal fundamental change in Apple's business.
After declining in fiscal 2019, earnings per share for the company are expected to increase in fiscal 2020, with the consensus forecast now sitting at a hair above $13 per share (10% growth). At $319 and change, Apple's forward P/E is now above 24x. When was the last time Apple's P/E was in the mid 20's? More than a decade ago! Most interesting is that Apple was much smaller and growing revenue extremely quickly back then (annual revenue growth of 47% between 2008 and 2012 thanks to the iPhone, which was released in mid 2007).
Apple shares have more than doubled over the last 12 months, despite little change in the business and hardware as a percentage of total revenue still above 80%.
Congrats to those who hoped Apple would garner a consumer staples multiple in the mid 20's a la Proctor and Gamble, McDonalds, Starbucks, or Coca Cola. I have no view on where the stock goes from here, especially since I never expected the P/E to ascend to this level. All I know is that for a stock that traded between 14x and 17x earnings between 2011 and 2017, when its organic growth was far faster, the current price implies investors are banking on a lot of good news in the coming years. So while the bar was previously set quite low for the company, due to trading at a material discount to the market, Apple's financial results will have to meet or exceed far elevated expectations to maintain a premium valuation. In a way, it signals that investors are banking on growth once again, and the dividend yield is now down to only 1%.
It will also be interesting to see how Wall Street analysts react to this latest stock price spike. Will they keep raising their targets or go to a more neutral stance? Amazingly, the average consensus price target for Apple among the 44 analysts who cover the name is $290 per share, or about 10% below the current quote. Only about half (23) have buy ratings.
While I would not short Apple unless than P/E got to nosebleed territory (say, 30+), I see little reason to own it at 24x forward earnings after a massive run. If investors value it more like a blue chip consumer brand going forward, the current price indicates that its equity returns will likely fall into that category as well.