It took Apple (NASDAQ:AAPL) nearly 38 years as a publicly-traded company to reach a $1 trillion market capitalization. It took just over two years more to add its second trillion, after getting a boost from 2020's version of stock market rocket fuel: a stock split.

On July 30, the iPhone maker announced a 4-for-1 split that would take effect Aug. 31. From the split announcement through Sept. 1, Apple soared 40%, giving the company a staggering $2.3 trillion market cap. Then it ran out of gas, and the fall has been steep and fast. Since Apple's Sept. 1 all-time closing high of $134.18 (split adjusted) to the close on Sept. 21 at $110.08, Apple was down 18%; its market cap fell to about $1.9 trillion.  

An Apple iMac displays a colorful screen.

Image source: Apple.

After such a steep drop, is it time to buy? Let's look at the company's stock-split history to find any clues and examine today's valuation and prospects. 

History lesson

Stock splits aren't new for Apple. It began trading publicly on Dec. 12, 1980, and this is the fifth split. The most recent one adjusted its share price from about $500 to $125. While one share at $500 is the same investment amount as four shares at $125, Apple executives believed the split would make the stock "more accessible to a broader base of investors."

Here's what happened after previous splits. 

Date

Split

3-Month  Change (Decline)

1-year Change

Notable

Aug. 31, 2020

4-for-1

TBD

TBD

Down 18% three weeks after split.

June 9, 2014

7-for-1

6.7%

38.6%

Unveiled Apple Watch three months after split

Feb. 28, 2005

2-for-1

(8.8%)

59.6%

Down 23% 2 1/2 months after split

June 21, 2000

2-for-1

20.6%

(57.2%)

Fell when dot-com bubble burst

June 16, 1987

2-for1

31.9%

16.6%

Down 50% during October 1987 market crash

Source: Yahoo! Finance.  Note: Returns exclude dividends.

The one-quarter picture: In the quarter following a split, shares were up three out of four times. In 2000 and 1987, the stock surged more than 20%, belying market collapses that were fast approaching. Conversely, the quarters in 2005 and 2014 weren't as good, but the stock was about to take off. The lesson: It's easy to get overly enthusiastic or distraught after a quarter's results, but three months is a tiny fraction of a company's life span.

The one-year picture: In three of the four one-year periods following a split, Apple shares crushed the S&P 500 by an average of 37 percentage points. That's not necessarily unusual, though. In 11 calendar years, including 2020, Apple has beaten the market by at least 50 percentage points, according to data from YCharts. 

But take a look at 2000's dot-com bubble implosion. A $1,000 investment in Apple on the day of the split was only worth $428 a year later. Investors who bought because of the split, without understanding Apple's fundamental business, may have sold at the worst possible time. Those who held on through the tech wreck and beyond have been rewarded. That $1,000 investment would be worth nearly $113,000 today.

The big picture: All kinds of factors can influence a company's performance, whether it's a market crash or a new product launch. Stock splits are among those factors, but they're short-term blips that don't create real stock market rocket fuel: revenue. Apple has been a massive winner for buy-and-hold investors because the company has strong leadership and is continually innovating. If you bought shares right before this latest big drop, remember: Investors who held through far bigger drops have been rewarded by simply holding on to their shares.

A look to the future

Apple's stock price is up more than 50% year to date (through Sept. 21). As the stock price grew, some key valuation metrics swelled to their highest levels in more than a decade, before recently pulling back with the stock price.

AAPL PE Ratio Chart

AAPL PE Ratio data by YCharts.

Even after the stock's recent decline, Apple's price-to-earnings, price-to-sales, and price-to-free cash flow ratios all remain roughly double their five-year averages. Today's P/E is 33, versus its five-year average of 17. Analysts forecast Apple to grow earnings by about 20% from 2020 to 2021. It needs to meet or exceed those expectations or the stock price could fall further.

The high valuations aren't just because of the stock split or the tech sector's big run in 2020. Apple reported strong quarterly earnings in July, and a recent Bloomberg report indicates that holiday-season sales of the company's 5G wireless networking iPhones might not be undercut by the impact of the coronavirus. Apple also continues to show strength in wearables, fueled by AirPods, Beats, and watches.

Through the first nine months of Apple's fiscal year, the wearables, home and accessories category increased revenue 26.6% year over year. The company's services division grew 16.1% in the same period. Those numbers are important to watch because they reflect Apple's efforts to broaden its revenue streams, thus reducing its heavy reliance on the iPhone. The iPhone accounts for more than half of Apple's total revenue.

Is now a good time to buy?

Apple's stock skyrocketed, and I believe the split (something that doesn't fundamentally change the company's prospects) sent it to irrational heights. Some of the split's enthusiasm may yet remain in the price.

But history shows there has never been a bad time to buy Apple stock, as long as it's with the intent of holding for the long term. In my opinion, an investor who wants to buy could benefit from doing that in increments: Buy some today and be ready to add more, especially if the price keeps falling.