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Is Apple Stock a Buy?

By Will Healy – Aug 26, 2020 at 9:39AM

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Will growth investors want to buy into such a large, established company?

Investors continue to bite into Apple (AAPL 2.56%) stock. Consequently, Apple has become the first publicly traded company on U.S. exchanges company to achieve a $2 trillion valuation.

However, this also means that investors will have to wait for a $4 trillion market cap to double their money in this tech stock. Moreover, valuations reached levels not seen in years. Now, the question is whether these milestones will deter growth investors, or if Apple will continue its march higher. Investors will have to determine whether this record valuation is just the beginning, or if it is time to cash in gains.

An Apple resurgence

Apple has experienced one milestone after another in recent days. It continues to surge since falling to its 2020 intraday low of $212.61 per share in March. Moreover, the 4-for-1 stock split announcement came right before it hit the $2 trillion mark. This also occurred just two years after it became the first American company to reach a $1 trillion market cap.

AAPL Chart

AAPL data by YCharts

As Apple stock price shoots past the $500 per share mark, this buying spree has also taken Apple's valuation to levels not seen at any time in recent memory. Apple spent years unable to boost its forward price-to-earnings (P/E) ratio beyond 20. However, the average forward multiple in 2019 rose to almost 22.2. Today, that forward P/E is around 32.

Mega-tech peers such as Microsoft and Alphabet have traded at higher valuations than Apple for some time. Now, Apple appears to have finally caught up with other tech giants in terms of investor interest.

Apple unexpectedly benefited from the pandemic

Interestingly, the company may owe some of its success to the coronavirus pandemic. Apple just reported its numbers for the third quarter of 2020. Many of the sales increases came from products that had registered anemic growth in past quarters.

Many people had turned bearish on Apple as iPhone sales, which made up slightly more than 44% of company revenue, had lost some of their ability to drive sales. However, iPhone sales increased 2% in the latest quarter year over year. While that appears anemic, it is impressive considering that most analysts expected slower sales in anticipation of Apple releasing a 5G iPhone this fall.

However, thanks to a sudden, increased need to work from home, PCs saw a resurgence in demand. Macs, iPads, wearables, and services all experienced double-digit surges in revenue.

This rise in sales led to an 11% increase in overall revenue, and the $2.61 in diluted earnings per share meant an 18% increase in profits from the same quarter last year.

Hands typing on laptop next to smartphone and cup of coffee.

Image source: Getty Images.

Apple can still drive growth

Observers seem to think Apple's growth will continue. The stock had barely hit $2 trillion before Wedbush analyst Dan Ives predicted the market cap would rise to $3 trillion by 2023. Ives cited the iPhone 12 and its 5G capabilities as a big reason for the continued growth.

Time will tell whether that prediction proves correct. The dividend yield of 0.7% will probably not draw significant investor interest, even though the payout has increased every year since 2012. Still, Apple's liquidity of about $193.6 billion should ensure its stability. Moreover, the prospect of a 50% gain in three years may attract growth investors who might otherwise hesitate to buy a stock with a high valuation.

Additionally, the pandemic drove a significant amount of this growth. In the third quarter of 2019, revenue increased by only about 1% from the previous year, and earnings per diluted share fell over that same period. While most divisions had double-digit increases in revenue, a drop in iPhone sales drove the poor overall performance at that time. Assuming Ives is right about the iPhone supercycle, this may turn into a temporary concern.

Despite the record-breaking market cap, Apple could generate enough growth to keep investors looking for high returns. Moreover, with a large amount of liquidity, and the history of rising dividends, I see Apple as a safe place to park funds for the foreseeable future.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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