The bear market just took a bite out of Apple (NASDAQ:AAPL), and it started underperforming the Index, hurting most portfolios. Our fundamental and technical SID rating system still rates AAPL as a Hold. The chart shows price dropping down to a support level. This is usually a setup for a technical bounce and in this case from $140 back to $150. This bearish move down for AAPL has not bottomed yet. We expect a retest of $140. AAPL still has the bearish pattern of lower highs and lower lows in price, telling us it will retest $140.
Fundamentally, AAPL is overvalued, and this bear market is taking overvalued stocks down to more reasonable valuations. If you go to the AAPL Valuation tab here on SA, you will see it is rated an “F”, so I don’t think we have to prove the thesis that AAPL is overvalued. However, we do want to drill down into the details of why it is overvalued. I like to look at PEG, P/S, and P/CF in particular and how these measures compare to the Sector Mean and to other popular stocks like Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN).
AAPL has a non-GAPP forward PEG of 1.81, which to me is overvalued, especially short term because of AAPL’s low growth rate. AAPL has already indicated that problems in China will reduce revenues next quarter. No surprise that price is dropping especially since the market is also dropping. Relative to the Sector Median, AAPL’s PEG is overvalued by 29%. By comparison, GOOGL’s is undervalued by 17%. MSFT is close to AAPL and overvalued by 24%. AMZN, which also has an “F” rating for valuation, has an enormous overvaluation of 322% compared to its Sector Median. This tells me that fundamentally AAPL is looking for a bottom in price that could be 20% lower. The chart will tell me when price forms a bottom.
Next is forward P/S. AAPL is best here while GOOGL is the worst. Based on the Sector Median, AAPL is overvalued 116% while GOOGL is 276%. Interestingly, AMZN is close to AAPL at 138%, while MSFT at 250% is closer to GOOGL. The only conclusion that I can make here is that AAPL is fundamentally overvalued.
Lastly, is P/CF. AAPL and MSFT are close on this metric. AAPL is overvalued by 20% while MSFT is 23% compared to the Sector Median baseline. GOOGL is at 54% while AMZN is very overvalued at 100%. I guess you could say that AAPL is a bargain compared to AMZN. Fundamentally, it tells me AAPL price is still looking for a valuation bottom in a bear market.
Where is the bottom? Currently, the forward PE is 22.45 based on a consensus forecast of $6.55. This market is taking PEs lower. If the FPE drops to 21, then price goes to $138 or FPE 20, then $131. The chart below shows a possible bottom at $126.
Now let’s look at our calculations for earnings in 12 months because we come up with a higher number than the consensus of $6.55. Our number is $7.01 and here is how we got it. We increased the TTM Net Income 10% from $101.9 billion to $112.1 billion. We dropped the number of shares by 3.5% to 16 billion, and that gives us $7.01 per share in 12 months.
Then we want to come up with some 12-month targets based on dropping PEs. So, a PE of 22 gives us a 12-month target of $154. We are looking for around 20% return, which means we buy at $128. At a PE of 21, Target $147, buy at $122. If PEs continue to drop to 20, then we buy at $118 or PE 19 and we look for a $111 entry. Let’s see what PE this bear market is assigning AAPL.
Here is our Point & Figure chart showing the support and an expected bounce to resistance at $150.
Here is our weekly chart. At the top of the chart, you can see our proprietary Hold Signal. Also, you can see the price breakdown below the long-term up channel.
This chart shows the Supply that is taking AAPL price lower. Chaikin Money Flow, CMF, is deeply in the red and has not turned up yet. The MACD selling cycle is peaking to the downside. Relative Strength, AAPL vs SPX, shows a breakdown, as AAPL starts underperforming the Index, a bearish indicator. The other two signals at the bottom of the chart show Supply increasing and they have not turned up yet. This tells us AAPL is still looking for a bottom. You can see that the S1 support level is at $134.