Apple: Now Significantly Overvalued – Don’t Be Fooled

Summary:

• Apple Inc.’s $3T market cap milestone sparked a flurry of analysts praises and financial media frenzy. Dip buyers need to ask who else is not on board?
• AAPL has significantly outperformed the S&P 500 since January and is now in significantly overvalued zones. Buyers chasing further upside from here need to be prepared for a crash in our view.
• Dip buyers could use the recent surge to rotate out and cut exposure, taking advantage of AAPL’s over-optimism, as late buyers bought into the hype.
• Don’t be fooled into thinking that AAPL could continue to outperform the S&P 500 at these levels.

As Apple Inc. (NASDAQ:AAPL) stock achieved its $3T market cap milestone last week, analysts and the financial media lavished praises on the Cupertino company, with Wedbush already looking for the $4T milestone.

I must admit that AAPL’s spectacular rally in 2023 surprised me. Even though Wall Street analysts don’t expect CEO Tim Cook and his team to post revenue growth (-2.4% YoY) for FY23 (year ending September 2023), the market is likely looking past its near-term challenges.

As such, AAPL’s outperformance against the S&P 500 (SPX) (SPY) since forming its January 2023 lows has given more fuel for Apple Bulls to expect a stronger-than-expected performance at its upcoming FQ3 earnings release on August 3.

Notably, Apple’s revenue and EPS decline are anticipated to bottom out in FQ3 before inflecting into positive territory from FQ4 onward as it launches its next suite of leading products, including the iPhone 15 series.

However, with AAPL’s valuation reaching nosebleed levels again, it’s also hard to argue against the possibility that the market has already priced in Apple’s growth inflection.

Historically, AAPL struggled when its forward EBITDA multiples reached the two standard deviation zone over its 10Y average, indicating that its relative valuation multiple is significantly overvalued.

The last time AAPL took out that level was in late 2021; buyers who rushed into the surge then saw a violent rotation that saw AAPL decline nearly 30% toward its June 2022 lows.

Sure, Apple Bulls will likely point out that we need to consider the right context even if we use history as a guide, and I agree. In addition, Bank of America’s (BAC) quant strategist Savita Subramanian indicated that his model suggests a continued rally in the S&P 500 through 2024, as the sell-side bullish positioning remains well below 2021 highs. In other words, Wall Street strategists are still pessimistic despite the strong market performance in the first half of 2023, which could lead to further gains moving forward.

With AAPL accounting for nearly 7.6% of SPY’s weighting, I believe Bulls could argue that an AAPL could still play a significant role in S&P 500’s potential upside.

However, I believe there are sufficient reasons to be cautious now. AAPL has outperformed the S&P 500 since early January, heading into significantly overvalued zones.

At a forward P/E of 30.5x against SPX’s 19.1x, I assessed that Apple Bulls putting their hopes on AAPL to continue leading the index through 2024 could be in for a massive disappointment. Underlying sector rotation toward undervalued sectors such as communications (XLC), real estate (XLRE), or even healthcare (XLV) could help the S&P 500 maintain its upward trajectory. However, expecting AAPL to eke out further gains beyond the current levels is probably asking too much from Cook & his team.

Also, AAPL’s price action suggests a much-needed pullback is increasingly likely, even though a strong sell signal isn’t in place yet. Notwithstanding, I believe that investors who scooped up AAPL in January should consider layering out, taking advantage of recent late buyers who bought into the surge, as AAPL took out the $3T milestone.

As seen above, AAPL has outperformed SPY since January, with an impressive recovery culminating in its $3T milestone.

However, AAPL/SPY’s upward momentum seems to have weakened this month, even though it’s still too early to be certain. Despite that, it pays to be cautious here, as astute market operators could use the over-optimism in AAPL to cut exposure at the expense of late AAPL bulls who continue to believe that the overvalued stock could defy gravity further.

A strong sell signal to cut more exposure could be initiated if AAPL breaks down below its September 2022 highs decisively, with buyers unable to muster further buying sentiments to sustain its breakout.

For now, I believe the opportunity to start taking profits is apt. Dip buyers who bought into AAPL’s lows should consider beginning to rotate, as AAPL could underperform the SPX significantly moving ahead.

Rating: Sell (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of BAC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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