To The Moon

Apple is going against astounding year-over-year comps from 2021's free-money/YOLO economy. But as the economy softens, are people really going to go out of their way to upgrade their iPhones? 2021 was "peak everything" for consumers, with spending on consumer goods like Apple's products being a key bellwether. Apple's U-turn on its planned iPhone production ramp is a clear early warning signal for earnings to decline, but few investors are listening. Apple has also been a prime beneficiary of tax cuts, QE, and stimulus, while the underlying net income of its business looks more sluggish and cyclical. While Apple is a decent business, you should not get sucked into paying high PE ratios for popular stocks with earnings at cyclical peaks, or your portfolio will likely suffer the consequences. Some buy-and-hold investors may consider this blasphemy, but since late 2019 Apple's (NASDAQ:AAPL) stock price has grown increasingly disconnected from the reality of its underlying business. Apple's stock is ground zero for investors that expect stimulus-fueled levels of consumer spending to last forever. In reality, investors are tripping over each other to pay a peak multiple for consumer discretionary stocks like AAPL at peak earnings. This is unlikely to succeed as an investing strategy. To this point, the present valuation of Apple is a gift to investors, who now have the opportunity to sell while the stock is overvalued and allocate money elsewhere. Data by YCharts The Pandemic Didn't Fundamentally Change Apple's Business Of course, Apple is a profitable business. But the beauty of looking at Apple's income statement is that it can tell you why the company is making more money and whether the share price is increasing faster or slower than the business. Apple's share price shows powerful gains, trading for about 5.9x more than it did 10 years ago. EPS is up a lot over the last 10 years (3.8x), but not as much as the share price. And EPS, in turn, is up a lot more than net income (2.4x). When you subtract out corporate tax cuts and the benefit from lower interest rates, earnings are only 2.1x the levels of 10 years ago. Moreover, nearly all of this growth has come recently during the pandemic. From 2012 to 2019, earnings before interest and taxes had only grown about 16%! The rest was all from tax cuts, lower interest rates, stimulus, and Apple's buyback. Not to discount the wisdom of buybacks in general- it was great when Apple was buying its shares back at like 10x earnings. But recently at 30x earnings? Not so much!