While this article is specific to Apple, we could have written a similar piece on Facebook, Amazon, or several other leading tech names whose valuations, based on our analysis, have lifted to levels we believe are unsustainably high in the short run. Because the market indexes are so highly concentrated in these companies, we are concerned about the valuation implications for the overall markets.

Apple has become the most recognized brand in the world and now represents over 7% of the S&P 500, the largest percentage by any single company in S&P 500 history. Much of the recent stock market rally has been led by the 5 most valuable U.S. companies—Apple, Microsoft, Amazon, Facebook, and Alphabet—which now represent a staggering 24% of the overall S&P 500. The run-up in Apple and the other tech companies leaves the market vulnerable to an outsized correction and/or major rotation.

The company’s track record of innovation and financial results are remarkable. Tim Cook, faced with seemingly impossible shoes to fill, has successfully introduced new products and grown ‘Apple Services’ into a behemoth. We hold Apple in as high regard as any company and have been periodic owners over the last several years.

However, at a price just above $500, an all-time high, Apple’s market valuation looks rather rich. Summarized in Table 1, Apple’s multiples are well above its 5- and 10-year averages. Its P/E multiple is 1.5 times that of the now overvalued S&P 500 index, versus a multiple that averaged the same as the market’s over the last 10 years.

Our analysis suggests a Fair Market Value (FMV) of about $380 for Apple, leaving the shares vulnerable to an approximate 25% decline. And that’s with some reasonably optimistic assumptions. Even worse, it and other large-cap companies normally trade between FMV and a 20% discount—a decline to which implies 40% potential downside. A stock’s FMV typically acts as a limitation to price. Today’s overvaluation is not the norm. And Apple, like most stocks, can be quite volatile. In the last 10 years, during a period of expansion, Apple suffered 5 periods of significant peak-to-trough declines: 2012-2013, -44%; 2015-2016, -32%; 2018-2019, -39%; 2019, -21%; and 2020, -34%.

TABLE 1. APPLE’S VALUATION METRICS

METRIC

CURRENT VALUE

5 YEAR AVERAGE

10 YEAR AVERAGE

P/E RATIO

37.8x

17.3x

16.6x

P/SRATIO

7.9x

3.7x

3.7x

P/B RATIO

29.5x

8.0x

6.5x

EV/EBITDA

24.6x

12.1x

11.2x

P/CF

27.1x

12.7x

12.0x

SOURCE: FACTSET, GENERATION PMCA CORP.