Is Apple Priced to Perfection, Based on Its Current P/E?

Key Points

• Apple has a relatively high Price-to-Earnings ratio of 30, which means it could be overvalued relative to revenue potential.
• If Apple can reach its $200.54 price target, it would clear a buy point above $198.33.
• Not only did iPhone sales decline in the third quarter, but so did PC sales. 

Has Apple Inc. NASDAQ: AAPL gotten too expensive for its own good? 

The largest S&P 500 component has notched small gains in recent weeks, but is down 6% in the past three months. 

Even so, the stock has a price-to-earnings ratio of 30, indicating that it still may be priced too high. 

However, take a look at MarketBeat’s Apple analyst ratings. The consensus view is “moderate buy” with a price target of $200.54, an upside of 12.42%.

If Apple achieves that level in the next 12 to 18 months, which is well within the realm of possibility, it would have cleared its current consolidation, below a buy point of $198.33.

Digging into the ratings a little more, you see that the majority of analysts have a price target above the stock’s current price, although brokerage firm Sanford C. Bernstein has a target of $167, and Morningstar estimates fair value at $150 a share. 

Single-Digit Revenue Growth

Morningstar’s Brian Colello says he views shares as undervalued, and that he foresees “only mid-single-digit revenue growth for the company over the next few years.”

That revenue growth rate is key to the stock’s potential for price appreciation. Revenue slowed in each of the past three quarters, the company’s longest sales slump since 2016.

Analysts have been lowering their revenue estimates in recent months. This year, Wall Street expects earnings to decline by 1% to $6.07 a share. 

One culprit behind the slowdown: The new iPhone 15, released on September 22, got off to a somewhat disappointing start, amid a global slowdown in smartphone sales. 

Sales of all iPhones fell by 2.4% in the most recent quarter, coming in $500 million below analysts’ forecasts of $40.2 billion.

PC Sales Declined in Q3

Meanwhile, market intelligence firm IDC found that global personal computer sales declined in the third quarter. “While most of the top 5 vendors experienced double-digit declines during the quarter, Apple's outsized decline was the result of unfavorable year-over-year comparisons as the company recovered from a COVID-related halt in production during 3Q22,” IDC said in an October 9 report. 

IDC reported that Apple Mac shipments fell 23.1% in the third quarter.

P/E Aligned with Growth Expectations? 

A stock is said to be priced to perfection when its P/E ratio reflects a balance between the company’s growth expectations and current market sentiment. 

In the priced-to-perfection scenario, the P/E ratio aligns with the company's growth prospects, implying that investors anticipate consistent and robust earnings growth. When that happens, the stock’s P/E ratio is often at the higher end of its historical range or industry average.

For example, Apple’s historical P/E, over the past decade, is 19.5. It peaked at 35.19 in December 2020. You could consider the current P/E as being pretty close to that high, although that’s happening while revenue and earnings expectations are being lowered. 

But here’s a big problem when revenue and earnings are dropping, and the P/E remains fairly high: In that situation, with any stock, not just Apple, investors believe the company can sustain its growth trajectory without hiccups, making it a compelling investment. 

Perfectly Priced, or Vulnerable to Decline?

However, any deviation from these rosy expectations can lead to a sharp correction, underscoring the fine line between perfection and vulnerability.

So what would it take for Apple to go back into strong rally mode? 

One thing that will continue to attract investors is the Apple dividend. The stock’s yield is 0.54%, not the best of the bunch, but it’s an additional incentive for investors to hold shares, as they get paid even while they wait for the next uptrend.  

In addition, Apple is among an elite group of quintessential institutional quality stocks. Analysts expect earnings growth to resume in 2024, with a gain of 8%, to $6.57 a share. Wall Street expects part of that growth to come from an uptick in sales of the iPhone 15.