Please ensure Javascript is enabled for purposes of website accessibility

Dow Jones Sinks as Analyst Warns on Apple and Microsoft Valuations; Home Depot Stock Slumps on Slowdown Fears

By Timothy Green – Updated Sep 18, 2020 at 1:38PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple and Microsoft stocks are historically expensive, and Home Depot's epic sales growth may not last.

The stock market was broadly lower on Friday, with the Dow Jones Industrial Average (^DJI -1.54%) down 0.13% at 12:05 p.m. EDT. The tech-heavy Nasdaq Composite was the worst performer among the major indexes, hurt by an analyst warning about tech stock valuations.

That warning pertained to Dow components Apple (AAPL -4.91%) and Microsoft (MSFT -1.48%), which are trading at historically high valuations after months-long rallies. Both stocks slumped on Friday, as did shares of Home Depot (HD -1.37%) following a separate analyst warning.

A risk dial turned to maximum.

Image source: Getty Images.

Barclays warns about big tech valuations

Mega-technology stocks like Apple and Microsoft have led the way since the market bottomed out earlier this year in the throes of the COVID-19 pandemic. Shares of Apple are up around 46% year to date, while shares of Microsoft have gained roughly 26% in the same timeframe.

This rally in tech stocks has pushed valuations to historically high levels. So high, in fact, that analysts at Barclays compared the current environment to that of the dot-com bubble two decades ago. "Measures of equity valuations are now at 2000 dot-com bubble levels and appear to be pricing in an ideal scenario," Barclays analysts said. Barclays cut its rating on Apple, Microsoft, and non-Dow tech giants Facebook, Alphabet, and Netflix to "market weight."

Both Apple and Microsoft stocks were trading for around 40 times earnings in early September. Following a quick sell-off this month, Apple stock currently goes for 33 times earnings, while Microsoft stock is priced just below 35 times earnings.

Apple has done well during the pandemic, unexpectedly growing sales in its most recent quarter. But demand for its gadgets has no doubt been boosted by economic stimulus, and it remains to be seen whether consumers will continue to freely buy Apple devices absent additional stimulus in the worst economy in many years.

Microsoft has seen strong demand for cloud services, productivity and collaboration software, and its Surface devices during the pandemic. But like all enterprise software companies, Microsoft is exposed to its customers tightening up their IT budgets due to economic uncertainty.

With valuations for Apple and Microsoft likely not reflecting these risks, both stocks were selling off on Friday. Apple stock was down 1.9% by early afternoon, while Microsoft stock had shed 1.4%.

A slowdown for Home Depot?

Like Apple and Microsoft, home improvement retailer Home Depot had done well during the pandemic. A combination of economic stimulus, less spending on categories like travel and restaurants, and people spending more time at home drove a huge increase in demand for home improvement products. In the second quarter, Home Depot reported comparable sales growth of 23.4%.

There's one big unknown: Did the pandemic create new demand? Or did it simply pull forward demand from the future? Analysts at Oppenheimer are worried about the latter scenario, downgrading Home Depot stock from "outperform" to "perform" on Friday. Oppenheimer believes investors are downplaying the chance that sales growth slows way down in a post-COVID-19 world.

Shares of Home Depot were down around 1.1% by early Friday afternoon. The stock has still climbed about 27% so far this year, but those gains could vanish if sales begin to disappoint investors.

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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, Home Depot, Microsoft, and Netflix 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$142.48 (-4.91%) $-7.36
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$237.50 (-1.48%) $-3.57
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$278.33 (-1.37%) $-3.86
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$29,225.61 (-1.54%) $-458.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.