Key Takeaways:
- The 2-Minute Valuation Model values Apple stock at ~$255/share in 2 years, which means investors might expect Apple to see ~6% annual returns.
- For this reason, Apple stock might be a little overvalued today.
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What is the 2-Minute Valuation Model?
If you think about it, there are really only 3 things that drive a stock’s long-term valuation:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Apple Looks Slightly Overvalued Today
Forecast
On Apple’s Analyst Estimates tab shown below, you can see analysts expect Apple
to grow revenue at a 7.0% compound annual growth rate over the next 3 years, with
normalized EPS expected to grow at an 11.5% CAGR:
View Apple’s full analyst estimates >>>
For context, Apple’s revenue grew at an 8.5% CAGR over the past 5 years, while
normalized EPS grew at a 17.8% CAGR. This means that Apple’s forecasted growth is expected to
be slightly slower than historical growth.
Valuation Multiple
Apple stock currently trades at around $228 per share, which is about 8 times next year’s expected revenue and 31 times next year’s expected earnings.
Apple has averaged a 27x forward P/E multiple in the past 5 years. Since this seems like a pretty reasonable multiple going forward, we’ll use this in our valuation:
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Fair Value
3 years from now, Apple is expected to reach $9.37 in normalized EPS. At a 27x NTM P/E multiple, that values Apple stock in 2 years at $253/share.
The NTM P/E multiple uses the next twelve months’ expected earnings, so a 2-year valuation uses 3-year EPS forecast figures.
We can also tack on an extra $2 to the fair value for the dividends that Apple is expected to pay over
the next 2 years, which leaves us with a fair value of $255/share.
With the stock trading at about $228 today, Apple would have to average about 5.6% annualized returns over the next 2 years to reach a fair value of $255:
Key Assumptions / Risks:
All valuations are simply educated guesses on how the future will unfold, so there’s always an element of randomness in any valuation.
These are some of the key risks that might make this valuation turn out to be wrong:
Risks:
- Revenue Estimates: Apple’s revenue estimates might be a little aggressive since analysts expect
revenue to grow at the same rate over the next 5 years as it has in the past 5
years, even though revenue declined 2.8% in 2023. - P/E Multiple: A 27x P/E multiple might be too low for Apple; it’s just the stock’s 5-year
average.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Apple stock might be a bit overvalued, with around 6% expected annual returns.
Don’t take our word for it – try it out for yourself! Analyze Apple stock or any stock
you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
