Is Apple’s Lofty Valuation Justified? Analyst Considers the Case

Taking the top spot, Apple (AAPL) is the world’s largest company by market cap. Valued at almost $2 trillion, the tech giant keeps swatting away whatever headwinds it encounters.

The level of devotion it inspires among its fans is like no other. Mega-cap rivals Microsoft and Amazon might also be considered untouchable titans, but their brands and products do not sparkle with the same aura as Apple’s offerings do.

That said, should investors be comfortable with how much its valuation has increased recently? Deutsche Bank analyst Jeriel Ong took a look inside Apple’s core, to explore why the giant from Cupertino has trounced all standing in its way over the last few years.

The analyst lists six reasons why he believes Apple’s valuation has expanded so dramatically: “1) S&P500 NTM P/E has expanded from ~17x from 2015-2019 to ~20x year-to-date on average and 23-24x of late; this has provided a tailwind to AAPL; 2) Risks of material unit share loss reduced (iPhone revenues largely stable despite negative preannouncements, iPad and Mac growing steadily); 3) AAPL has increasingly integrated their ecosystem together: 4) AAPL has increasingly shifted revenues/profits to higher services/software mix as a percentage of revenue, and as a result has a more consistent/stable margin outlook; 5) Wearables has risen driven by Watch/AirPods; 6) Shareholder return strategy increasingly valued.”

Pertaining to point three, Ong highlights what might be the most telling insight of all. Apple is not an iPhone company, but an “iOS device company, and those who buy more iOS devices are stickier.”

Still, amidst the many positives, Ong also sees several reasons why investors should proceed with caution when considering Apple as an investment.

These include the fact that gross/operating margins aren't much higher than what they used to be, top-line growth hasn't really accelerated over time, and the possibility that 20% of the company’s business (Macs and iPads included) “could remain stagnant growth-wise going forward.” The analyst also believes Apple’s future share price appreciation will be more dependent on bread and butter metrics like revenue and EPS as opposed to being “valuation driven.”

However, Ong feels there’s more upside left, as his assessment is summed up with a Buy rating alongside a $480 price target, which represents a modest upside of 4%. (To watch Ong’s track record, click here)

So, that’s Deutsche Bank’s view, how does the rest of the Street see the next 12 months panning out for Apple? Based on 23 Buys, 6 Holds and 2 Sells, the analyst consensus rates the tech giant a Moderate Buy. Yet, according to the $432.12 average price target, the Street expects shares to dip 4% from current levels. (See Apple stock-price forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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

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