Is Apple Overvalued?

Apple has been the spotlight of attention this year. Investors like Warren Buffett have been buying Apple shares in the open market. Now if guy like Warren Buffett thought that Apple was a good buy at around $175, I am sure he did his analysis. But now that Apple is around $220, do you think it might be overvalued?

If we were to focus solely on numbers, YES! It is definitely overvalued! To start off, at the current price of $218, Apple’s P/E Ratio (Price to Earnings Ratio) is 21.77. In other words, the price of the stock is 21.77 times the earnings i.e. you are paying a 21.77x premium. The P/B Ratio (Price to Book Ratio) is 7.85 (using current price of $218 and Book Value of 27.75/share as per the most recent 10k). If you were a disciple of Ben Graham, for a stock to be considered attractive, the P/B ratio would have to be below 1.5.

However, financially, Apple is a very strong and stable company. I personally would not mind paying a premium to own apple stock. The Debt to Equity Ratio is 0.81; Debt can disrupt even the best businesses since it limits flexibility and agility. Having a debt to equity ratio below 1 is definitely a good sign. Furthermore, Apple’s current ratio (i.e. Current Assets over Current Liabilities) is 1.27; It is good when a company’s current ratio is above 1, which implies that there is more money coming in that what is going out. Another intriguing ratio is the Inventory Turnover Ratio (i.e. Revenue over Accounts Receivables). Apple has an Inventory Turnover Ratio of 29.05, which implies that Apple turn overs its inventory 29 times in 1 year. That is pretty impressive! Lastly, when performing a Discounted Cash Flow (DCF) calculation using a discount rate of 6.75%, long term growth rate of 3%, and 4829.93M shares outstanding, I end up with an intrinsic value of $222.02/share. In other words, if you were to buy Apple shares at $222.02/share, you would get a 6.75% annual return on your investment.

Now when Warren Buffett bought Apple, he looked at many other things such as Apple’s long term prospects and its competitive advantage. Apple definitely has a “moat” that Buffett seeks i.e. Iphone and Mac users see that there is a big “switching cost” associated with trying other non-apple options. In other words, Apple is “sticky”; once you become an Iphone user, you are likely to stay an Iphone user for years to come.

So, after all that talk, do you think Apple is overvalued? Let me know what you think.



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