Apple’s Record-Setting Advance Comes With A Big Cost

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Michael Kramer and the clients of Mott Capital own AAPL

Apple Inc. (AAPL) has been on a tear since announcing their 4-for-1 stock split, with the shares rising by more than 30% since July 31 and pushing its market cap over $2 trillion. The massive push higher comes in advance of the big upgrade cycle that is likely to come when Apple releases what is widely expected to be its newest iPhone in the fall with the fifth generation of wireless technology (5G).

What is most ironic about this move higher, is that the stock is trading at its highest one-year forward PE ratio since 2007. That was the same year the first iPhone model was revealed. But more importantly, the stock’s big push comes at a time as interest rates plunge, and investors are flocking to the companies with the most significant balance sheets.

Shares Are Pushing Higher

The company does have one of the most substantial balance sheets out there. At the end of the June quarter, Apple had short-term cash and investments of $93.0 billion and long-term investments of $100.6 billion.

The enthusiasm around the stock-split has undoubtedly helped to boost the equity. Although it changes nothing from a fundamental standpoint, it may allow some investors to access the stock now and build positions in the name. Additionally, it is likely to make options trading more accessible as well.  

Low Rates

More importantly, it may be the low rate environment, which is helping to push the stock higher. The company currently has a dividend yield of about 66 basis points. That dividend yield stood at 1.37% in March when the stock fell to around $225. Coincidence or not, the stock’s dividend yield is now inline with the 10-year Treasury rate of about 63 basis points on August 24.

Historically Apple has always traded with a dividend yield that is below the 10-Year Treasury rate. The move higher in Apple could be an effort by the market to push Apple’s yield lower back to the historical norm, which is below the 10-Year Treasury rate. Remember, as stocks move higher, dividend yields move lower.

Coming At A Cost

However, the big push higher comes with a cost, because it sent the stock’s valuation to its highest level in years. Currently, the stock has a forward PE ratio of 29.7 based on fiscal 2022 earnings estimates of $16.75 per share. The last time the stock traded with a PE ratio, this high was in 2007, when the iPhone was released for the very first time. One could easily argue that it was a completely different company then, with a very different product line-up.

The Next iPhone

The optimism around the next-generation iPhone is also likely helping to push the shares higher, and driving earnings and revenue estimates for 2021 higher. Currently, analysts are forecasting revenue to climb by 12.4% in 2021 to $307.3 billion. Meanwhile, earnings are forecast to rise by around 20% to $15.52 per share.

Whether Apple’s stock rises or falls from this point forward over the short-term may not matter. What will matter is the company’s ability to innovate and drive revenue and earnings over time; allowing the shares to grow over the long-term.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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