As Shares Tread Water, Wait for a Pullback With Apple

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Since the stock split in late August, Apple (NASDAQ:AAPL) stock hasn’t exactly set the world on fire. Sure, after more than doubling after March’s novel coronavirus crash, it’s reasonable interest has cooled as of late. But, with AAPL stock still trading at an elevated valuation, it’s hard to justify a buy at today’s prices.

AAPL stock

How so? Sure, fundamentals remain on point for this FAANG component. Yet, even when accounting for growth, today’s forward price-earnings (P/E) multiple (36x) still looks rich.

Valuation hasn’t been a top concern in 2020’s stock market. With “growth at any price” the market’s mantra, those who have tried to call a top have lost big going against the grain.

But, buying the winning big tech stocks now is a wager that the enthusiasm over these names will continue in perpetuity. Hardly an encouraging risk/return proposition.

So, does that mean I’m bearish on Apple? Far from it. With its economic moat, strong balance and high cash flow, this is not the kind of stock you want to short. But, buying on a massive pullback could wind up a shrewd move in hindsight.

Will we have such an opportunity in the near term? It’s possible. Sure, a low-interest rate enviornment means a valuation contraction isn’t likely. But, recent backlash over big tech’s power may mean an end to the sector’s hot run is just around the corner. And, much a development could create a solid entry point for this high-quality stock.

Why AAPL Stock May Be Out of Gas for Now

It’s no surprise that Apple shares haven’t done much since the Oct. 12 launch of its 5G iPhone 12. Much of the stock’s epic run during the spring and summer was fueled by the company’s pandemic tailwinds. But, anticipation over this product launch played a material role as well.

However, no matter the rationale behind the stock’s outsized performance, there’s not much left in the tank to drive shares higher. That’s view of InvestorPlace’s Mark Hake, who on Oct. 20 discussed valuation concerns with AAPL stock.

As Hake sees it, upside won’t happen until earnings catch up to its current valuation. Sure, with double-digits earnings growth projected in the coming year, this could happen. But, it also means there’s little rush to buy shares today.

But, while there isn’t much in the short-term to drive investors to bid the stock higher, there is something on the horizon that could sink shares lower. I’m talking about the specter of increased regulations/scrutiny for big tech. As backlash against this hot sector accelerates, an across-the-board correction may be in the cards.

Tech-Stock Correction Could Create a Solid Entry Point

After the sector’s hot run this year, many have waited for an inevitable correction in tech stock valuations. But, with interest rates near-zero, Wall Street still has the rationale to justify sky-high multiples.

However, increased scrutiny from the federal Government may be the straw that breaks the camel’s back. Sure, so far only Google parent Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) has faced the ire of the U.S. Justice Department.

But, the agency’s antitrust suit against Google may have repercussions for Apple. As Barrons reported Oct 21, Apple receives as much as $10 billion a year from Google in exchange for the search giant to be the default search engine on Apple devices.

Given much of this falls to the bottom line, this deal makes up a good amount of Apple’s earnings. Obviously, this lawsuit is more of a problem for GOOG stock than for AAPL stock. But, it may be a sign where things are heading regarding a clampdown on big tech’s economic and political power. And that direction doesn’t bode well for the major tech stocks.

Granted, partisan infighting may enable big tech to play both sides of the political aisle to its advantage. But, with a majority of Americans now concerned over this influence, bipartisan action against the industry may finally come to fruition.

While regulatory changes probably won’t sink the big tech companies, it could help to burst the current bubble. And, by waiting for the correction, you may have the opportunity to enter AAPL stock at a reasonable entry point.

High Quality Name, But Wait for A Better Price

As one the highest-quality stocks out there, it’s easy to make the bull case for Apple. But, with many factors (low-interest rates, pandemic tailwinds) propping up its rich valuation, now’s not the time to buy.

Yet, with the backlash against big tech’s economic and political power accelerating, more scrutiny and regulation could be on the horizon. This could drive a temporary correction, giving you a solid entry point for AAPL stock. Granted, it’s tough to predict when it’ll happen, but waiting for a big pullback is the best move for now.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.

More From InvestorPlace

The post As Shares Tread Water, Wait for a Pullback With Apple appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Latest Markets Videos


InvestorPlace is one of America’s largest, longest-standing independent financial research firms. Started over 40 years ago by a business visionary named Tom Phillips, we publish detailed research and recommendations for self-directed investors, financial advisors and money managers.

Learn More