Stock market bubbles can be intoxicating as the psychological battle between the fear of missing out, versus the logic that stocks are clearly overvalued transpires. Apple (AAPL) is arguably the best-known stock in the United States, so it makes a great example to discuss just how wild current valuations are. Now Apple’s market capitalization is nearly $4 trillion dollars! This is clearly a massive enterprise, which requires huge growth to move the needle. A lower growth rate seems likely, and we have seen very little growth over the last few years. You’d think the valuation multiples would reflect that, but it is the opposite.
Apple’s price to earnings ratio is 41x, nearly double its 10-year average of 22x. If you invert these ratios, you get the earnings yield, which would be what the company pays out to shareholders if it paid out 100% of its earnings as a cash dividend. The earnings yield is a paltry 2.44%, versus the 10-year average of 4.55%.
Apple enterprise value to EBITDA ratio is 28x versus a 10-year average of 16x. Apple’s price to sales ratio is a staggering 10x, versus a 10-year average of 5x. A simple reversion to the mean would result in very material losses from current levels.
These elevated valuations aren’t unique to Apple, as most of the Tech sector seems highly overvalued. This doesn’t mean that the stocks will correct, tomorrow, or next month, or even next year necessarily, but the risks are very high right now. It’s difficult to see how these stocks can perform very well in aggregate over the next 5 or 10 years. I’m just going to keep this short, but I thought a basic example would be helpful.