Asked on 08 Dec 2019
How do you judge if a company is overvaluing themselves? Do you see any potential problems with this?
Top Contributor (Dec)
A lot will depend on how Apple continues its ecosystem dominance.
They are well known for killing off their products in order to set the standard for the next wave. The iPod was replaced by the iPod touch was replaced by the iPhone.
So a lot depends on how they execute the next wave of whatever they have in mind. Apple has always been very strong in execution and tying everything seamlessly, so
if they can continue this streak, the stock will continue to climb. Tim Cook is no Steve Jobs, so some day they will have to find someone just as visionary. Frankly I'm a little sad Jobs passed on, as he has the ability to innovate two or three generations ahead. Would have been interesting to see what direction and products Apple would have taken if he was still around.
I think it is fairly valued. But for them to become double the size, very difficult.
Right now, I do feel it is a bit excessive despite their shares buy-back.
Currently, they are moving their revenues from hardware to subscription. If it is proven, their valuations should be valued higher because of recurring revenues!
Hey Kelvin, really interesting question! Apple currently has a PE ratio of around 23, which seems high at first glance. I own shares, so take my response with a ladle of salt =)
I think the wild card will be the growth of Apple's services business. Not many realise just how massive the services business of Apple is. It has 420 million paid subscribers, and has trailing revenue of more than US$40 billion. For context, Facebook's revenue is US$66 billion. Apple's services business also has a much fatter gross profit margin (60+%) compared to its hardware business. If Apple continues to grow its services business, the market may be more than happy to continue awarding the company a high earnings multiple, since this services business is very sticky with high levels of recurring revenue.
Apple's wearables business is also worth keeping an eye on. I believe that the Apple Watch, which includes an electrocardiogram (ECG) function, could become an actual healthcare devices - in other words, the Apple Watch could become a need more than a want.
I'm well aware that the iPhone business of Apple is now stagnating. But the services business and wearables business are two bright spots. Even if iPhone sales stop growing from this point on, services and wearables could carry the day for Apple.
Personally yes, i forsee that apple's revenue and profits will fall and this means a P/E of 12 today may be a P/E of 20 tomorrow.
Reason being is because its lurative and high margin mobile phone segment iis gradually being lost to cheaper android models which does the same thing and have better specs (Huawei and Google Pixel phones).
The saving grace Apple has a large hoard of cash which it is using to buy back shares. This helps to reduce the share base and prevent the P/E ratio from creeping upwards too much
When Apple was a billion dollar company, many investors asked this question. Now that it has hit the trillion dollar mark, the same question re-surfaced.
There and again, we will analyse the business model that Apple has, which has ensured its sustainability so far. What is definitely impressive is its vision for the future, listening to consumers and giving in to consumers' demand. While it is playing the catch-up game lately, its branding and marketing is so strong that "because it is Apple", consumers will buy.
At a tech-saturation point now, I'm curious to see what they are up to. And I'm confident that there are more to come. Hence the valuation may be excessive but it is not over yet.
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