Is Apple’s stock too expensive?

A Company Fined more than £100,000 after it imported fake Apple chargers

This $2.1 trillion company has built one of the greatest consumer product ecosystems of all time. The company’s “closed” ecosystem and intense customer loyalty provide investors with an impressive moat. Apple has leveraged its growing ecosystem over time to provide consistently growing cash flows that support its valuation. (See Apple stock analysis on TipRanks)

The largest company in the world by market cap, Apple (AAPL) remains a top holding of many investors, for various reasons. For those invested in passive funds such as ETFs, Apple will indirectly end up being the largest holding in most market-cap weighted index ETFs. For active investors, Apple’s long-term capital appreciation growth has frequently turned this behemoth into the largest position organically.

That said, there’s reason to be cautious with Apple right now. The company’s seen some downside momentum materialize of late, and there’s certainly room to speculate that this momentum could continue from here.

Here’s why investors should remain cautious with Apple right now.

Apple’s Valuation Multiples Rising Faster Than Its Earnings

Earnings quality matters to investors. Indeed, today’s overvalued market is filled with companies with questionable earnings growth, from a sustainability standpoint. The fact that Apple is able to provide such consistent growth, given its size, makes the company’s cash flows more valuable to investors on a relative basis.

That said, looking at the company’s valuation multiples relative to its earnings growth, Apple’s share price appreciation is mainly the result of multiple expansion rather than its underlying fundamentals.

A number of recent high-quality pieces of analysis have pointed this out. Indeed, it’s difficult to justify paying twice as much on a relative basis to own stocks right now. Nonetheless, this is the market we’re in.

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