Is Apple Stock Starting To Look Frothy?

Shares of Silicon Valley giant Apple (NASDAQ: AAPL) have been on an absolute tear this summer, posting more than a 100% rally off Q1’s lows.

The iPhone maker was one of the heavyweight tech companies that led equities from the front out of March’s lows in the stunning recovery that hasn’t run out of steam yet. By the start of June, Apple shares had reclaimed their pre-COVID levels and were punching up into fresh all-time highs. The hype increased throughout the summer as techmania gripped Wall Street, with scores of flashy names soaring on increasing consumer demand, a vastly improved economic outlook and strong risk-on sentiment.

Excellent Numbers

Apple reported their Q3 earnings late last week after Thursday’s session and showed investors that there was solid justification for all the hype in recent months. Not only did EPS come in far higher than analysts expected but revenue was a full $7 billion above the consensus and up 11% year on year. It was an absolute knockout report and shares opened with a 7% gap up the next day and are up 14% since, closing out Wednesday’s session at $440.

Luca Maestri, Apple’s CFO, summed up just how good the report was when he said “our June quarter performance was strong evidence of Apple’s ability to innovate and execute during challenging times. The record business results drove our active installed base of devices to an all-time high in all of our geographic segments and all major product categories. We grew EPS by 18 percent and generated operating cash flow of $16.3 billion during the quarter, a June quarter record for both metrics.”

The numbers left many analysts speechless and scrambling to update their price targets. Piper Sandler noted that the pandemic has had little to no negative effect on Apple’s operations and upped their price target from $310 to $450. Cowen upped their target by 18% to $470 while Goldman Sachs were more cautious and only moved theirs to $314, a level that Apple last traded at in May.

Goldman’s almost reluctant update is worth noting as concerns about big tech valuations getting frothy begin to grow. For context, the market capitalization of the top 5 tech companies in the S&P 500 index now account for a full 20% of the index’s value. With many of them seeing relative strength index prints of above 70, indicating overbought conditions, it’s hard to blame investors for being slow to get involved for the first time now.

Risk Versus Reward

Still, it takes a brave analyst to downgrade the world’s most valuable company. All the more so after the move shares have made but that didn’t stop Wamsi Mohan from Bank of America on Wednesday. As part of a downgrade on Apple’s stock from Buy to Neutral, he cited the unfavorable risk/reward profile at current levels. It’s hard to disagree with him, particularly as estimates for Apple’s 2021 number have remained mostly unchanged, despite the market cap doubling in four months.

Mohan also sees the long-awaited 5G iPhone rollout as being trickier to profit from than many expect. For example, gross margins could be threatened if consumer costs are too high. At the same time, however, while cutting his rating on the stock he also increased his price target from $420 to $470. It kind of feels like he was stating a cautiously bullish position.

It will be interesting to see if any other analysts on Wall Street follow his lead this week and caution investors about going in too heavy now. There’s no doubt Apple has built a phenomenal engine that has time and time again proved the naysayers wrong. Any weakness is sure to be short term and should be viewed as a long term buying opportunity.