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Why Apple Stock Is Slumping Today

By Timothy Green – Sep 2, 2020 at 12:59PM

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A sky-high valuation may be giving investors pause.

What happened

Shares of Apple (AAPL -2.12%) were down on Wednesday, taking a break from the rally that has pushed the stock up nearly 80% this year. While there was some negative news for Apple related to a lawsuit with VirnetX, it's unlikely to be playing much of a role. Apple stock was down about 2.8% at 12:15 p.m. EDT after having been down as much as 5.4% earlier in the day.

So what

Apple was ordered to pay VirnetX around $440 million earlier this year for infringing on patents in a decade-long case. On Wednesday, Apple's request for relief was denied by the U.S. District Court for the Eastern District of Texas.

A smartphone with a cracked screen.

Image source: Getty Images.

Given the size of the lawsuit relative to Apple's $2 trillion plus market capitalization, it's unlikely that Apple investors are reacting to this news. Instead, Apple's decline on Wednesday could be related to a stretched valuation.

Valued at around $2.2 trillion, the tech giant trades for roughly 40 times earnings. That's the most expensive the stock has been in more than a decade.

Now what

Apple managed to grow sales during the worst of the pandemic, reporting 11% revenue growth for its fiscal third quarter. That growth was partly due to the successful launch of the affordable iPhone SE, but economic stimulus measures almost certainly played a big role. Direct payments to Americans and a super-charged unemployment benefit, coupled with stay-at-home orders and less spending on categories like travel and restaurants, created an environment where Apple's gadgets were in demand.

Whether that demand is here to stay remains to be seen. Apple will be launching new iPhones into a very weak economy, and Congress has yet to agree on additional stimulus measures. Consumers may not be as eager to upgrade their iPhones in the coming months as they were in the early stages of the pandemic.

One day does not make a trend, so Apple stock could keep rallying in the days and weeks ahead. But valuation eventually matters, and Apple's is approaching nosebleed territory.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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