When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 17x, you may consider Apple Inc. (NASDAQ:AAPL) as a stock to avoid entirely with its 29.7x P/E ratio. However, the P/E might be quite high for a reason, and it requires further investigation to determine if it’s justified.
Before we start, investors should know that Apple has an outstanding performance in multiple areas, such as cash flows, working capital management, earnings quality, and especially returns.
You can view our detailed report on Apple in order to get a clear picture of the company’s fundamentals. You can also read what qualitative factors are impacting Apple’s growth here.
Today, will go over the fundamentals of Apple, and see why some investors might like the stock even at a more expensive valuation. Of course, buying a stock at “any” price is slowly building a house of cards, and investors might want to be more patient with their stock picks.
With earnings growth that’s superior to most other companies of late, Apple has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue.
If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Apple
The chart above shows us that the company is valued more expensively than both the market and sector. While the P/E is not preposterous, it might be worth thinking if investor’s enthusiasm is justified.
One thing that can help investors with having a clearer picture of a company’s future, is to think of a few possible events that can boost and a few that can weaken the stock.
For example, one great catalyst might be the global chip shortage, which will translate in stronger profits for Apple. A negative catalyst might be the recent settlement in the app store related court case.
Investors may also be keen to find out how analysts think Apple’s future stacks up against the industry, and can take a look at our free report.
Is There Enough Growth For Apple?
Apple’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 55%. The latest three-year period has also seen an excellent 85% overall rise in EPS, aided by its short-term performance.
Turning to the outlook, the next three years should generate growth of 6.0% each year, as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is noticeably more attractive.
With this information, we find it concerning that Apple is trading at a P/E higher than the market.
Investors sometimes conflate the love for the company with the future performance of the stock. If we…
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