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Apple at $2Trillion

Both Tesla and Apple split their stock today, and both are up big as people are panic buying the now lower priced shares.  Apple, at $2Trillion in market cap, is bigger than the combined economies of Canada + Russia + Spain…cogitate on that for a moment.

Apple Price

Double click on any image for a full size view

The graph above shows the stock price for Apple over the last 5-years.  It has gone vertical in 2020, and added another 3.5% today on the split (a mere piker compared to TSLA which added 12.5% today).

The valuation for Apple has gone equally crazy:

Apple PE

This is a graph of its P/E Ratio.  At the end of 2018, it was 13X but today is 38X.  You would imagine that its earnings have skyrocketed higher and that encourage investors to push the stock price up.  Not so much:

2015:  $71Billion Net Income

2016:  $60Billion Net Income

2017:  $61Billion Net Income

2018:  $70Billion Net Income

2019:  $63Billion Net Income

TTM:  $67Billion Net Income

This looks to me like they are roughly capped in earnings at or below $70Billion per year.  How can that justify a stock price that is up 150% and a valuation that has tripled in 18 months?  No idea.

As the largest company in the country (and larger than many countries) Apple benefits from being a part of virtually every mutual fund and exchange traded fund on the market.  As long as the overall market goes up, the value of those funds and ETF’s go up, making people buyers.  Every buy of those funds and ETF’s pushes the stock price up – but what investors are not likely ready for is when the turn comes.

As fast as the price and valuation have increased, you will see it go down in a similar manner.   TSLA will be an even bigger blood bath for the people that bought in the past 5 months – and you may not even know you bought it since you have a 401k with mutual funds that might be buyers just to keep their performance numbers competitive with the indices.

The entire investment world is all in on the stock market moving higher.  They have bought into the idea that the Federal Reserve will keep the liquidity flowing which will support the stock market.  I just don’t believe that is true – there is a point where buying TSLA at a 1,500 P/E or even AAPL at a 38 P/E (or higher) doesn’t make sense.  To get a feel for what the 38 P/E means is that it takes 38 years for the company to earn its stock price.

If you were starting a company and invested $100,000, a 38 P/E means you earn $2,631 per year, or a 2.6% return.  (1) would you be willing to 38 years to earn back your investment? (2) would you be happy with a 2.6% return for 38 years just to break even?  If not, why would you buy stock in a company with the same valuation?

You can argue that TSLA will, in the future, have growing earnings as its product and industry mature and they will over time grow into a more normalized valuation level – I have trouble believing it, but it is certainly possible.  However, Apple is a mature company that hasn’t grown its net income in five years – you logically do not expect it to see its earnings skyrocket in coming years as TSLA could.

I have been in the wealth management industry since 1982 in one form or another.  One rule is certain to come true:  if you over-pay for a stock, it always ends up as a bad idea.  You can look smart in the short-term, but if you don’t sell and lock in your short-term gain, you will watch it disappear in due course as the market euphoria fades and reality sets in.  The smart money is applying this analogy to the stock market in general.  I know that I am.

–Mark