The market capitalization surged by 1 trillion US dollars in the past four months, and the price-earnings ratio hit a new high since 2008: Apple (AAPL.US) earnings report hardly tolerates the slightest disappointment
Apple's (AAPL.US) stock price has risen in recent months, leaving little room for disappointment in the iPhone manufacturer's earnings report after Monday's market.
The Zhitong Finance App notes that Apple has risen 25% from its low at the end of June, and its market capitalization has increased by about 1 trillion US dollars, as the company's steady revenue growth and rising free cash flow have provided a safe haven for investors who are afraid of large capitals such as Alphabet (GOOGL.US) and Amazon (AMZN.US) investing heavily in AI infrastructure.
This round of rise puts the stock at the most expensive valuation level since 2008. Once the company's performance falls short of expectations, the stock price will be particularly vulnerable. According to data compiled by Bloomberg, based on the expected profit for the next 12 months, Apple's price-earnings ratio is 36 times, almost double that of the S&P 500 index.
Apple is the best performer among the “Big Seven”
Ben Carew, Co-Chief Investment Officer of Tandem Investment Advisors, who holds Apple shares, said, “Apple's valuation is in the 99th quartile of its historical valuation. When something is priced so fully, there is a risk in the event of an accident. Currently, it plays the role of a safe-haven asset, but if its growth is weaker than market expectations, people will feel that it is not that safe, and we may see the valuation multiples revalued.”
Apple watchers should be no stranger to this risk. Three months ago, the stock recorded its biggest one-day decline in 16 months as parts shortages dragged down its quarterly revenue guidance.
Wall Street expects Apple's revenue to grow 11% to 113.5 billion US dollars in the fourth quarter of the fiscal year, and net profit by 6% to 29.2 billion US dollars. Although this will allow Apple to achieve its best year of sales growth since 2021 (15%), average analysts' expectations indicate that expansion is expected to slow in the next two years.
For the first time, Apple's earnings report will truly reveal the popularity of its new folding screen iPhone Duo. The device went on sale this month, and the company said demand was “extraordinary,” and delivery was delayed until next year. However, analysts believe this may reflect limited supply, and reports of the iPhone Duo screen cracking soon after use may weaken the product's appeal to non-early adopters.
The iPhone Duo is essential to Apple. It not only represents the biggest design change for the company's flagship product in many years, but the starting price reached 1999 dollars. Investors hope this high-end price will boost growth. According to Bloomberg industry research estimates, the phone may generate sales of 28 billion to 32 billion US dollars in fiscal year 2027, and push up average sales prices as consumers migrate from cheaper iPhone Pro and iPhone Pro Max models.
Technology safe-haven deals benefiting Apple were fully demonstrated last week, when disappointing earnings reports from Alphabet and Amazon caused investors to flee AI-related stocks one after another. The Philadelphia Semiconductor Index plummeted 7.2% last Friday, the worst single-day performance since June, while Apple's stock price fell only 1.2%, outperforming the S&P 500 index.
As Nvidia (NVDA.US) stock prices were involved in the sell-off, Apple surpassed the chipmaker on Friday to become the company with the highest market capitalization in the world for the first time since July, with a market capitalization of 5.03 trillion US dollars.
Apple's price-earnings ratio is close to a multi-year high
Although Apple's revenue growth lags behind most of its big tech peers, its free cash flow stands out. As investors become more skeptical about the AI spending frenzy, free cash flow has become a key indicator. In fiscal year 2026, Apple's free cash flow is expected to increase by more than 40% to US$141.5 billion, and further growth is expected in the next three fiscal years. In contrast, Alphabet, Meta, and Amazon's free cash flow gaps are expected to continue.
Daniel Flakes, senior research analyst at Lubomai, said, “The market recognizes Apple's free cash flow advantage. If it continues this advantage, I think the stock can create more value from the current level. Its ability to execute on the product cycle and its ability to turn it into strong free cash flow growth is the most important factor for the stock, and at least from initial signs, the market is very interested in Duo.”
Despite this, high valuations combined with low growth have dampened Wall Street's enthusiasm for the stock. Since Apple released its last earnings report at the end of July, at least six analysts have downgraded their ratings. Loop Capital downgraded Apple from “buy” to “hold” in October, citing iPhone shipping trends; Bank of America removed it from the US No. 1 best investment target list on Friday, saying “it is cautious about its recent allocation given that there may be headwinds compared to market consensus expectations.”
Less than 60% of analysts tracked by Bloomberg recommended purchases, compared to over 90% for Microsoft, Amazon, and Meta. Furthermore, the stock's trading price is already higher than analysts' average target price, making it the only “Big Seven” stock with implied negative returns over the next 12 months.
Apple is once again the company with the highest market capitalization
Tandem's Carou said, “Valuation is a key risk facing Apple, but it really should enjoy some kind of premium because there is much more certainty around its business model. The fluctuations we've seen elsewhere in the tech industry reflect the uncertainty these companies face. Unless Apple's earnings are really questionable (I can't foresee this happening), it should at least be immune to some of these fluctuations.”