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Can MSFT & AAPL Stretch Their Valuations Any Further?
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The US’s two largest publicly traded companies have reported their final 2019 quarterly results, and the markets were impressed. Apple (AAPL - Free Report) and Microsoft’s (MSFT - Free Report) have continued to dominate their fields of operation, impressing analysts and investors alike, despite already elevated expectations. Both of these trillion-dollar companies have driven substantially higher returns than the broader market the past 52-weeks. Now we need to be asking whether these seemingly prolific returns can continue?
Together AAPL and MSFT make up almost 10% of the total S&P 500. These two equities are undoubtedly market movers, but their most recent earnings beats don’t appear to be guiding the markets any higher.
I believe that we are hitting an inflection as investors begin to realize that most of the gains in 2019 were valuation pushes. The S&P 500 has rallied 30% since the beginning of 2019, but its forward P/E multiple has been stretched over 25%.
2019 illustrated relatively modest real growth. Q4’s commerce department GDP report demonstrated that our economy grew only 2.3% in 2019, the slowest growth since 2016. The markets priced in an enormous amount of future growth this past year, and the rich valuations are starting to make investors nervous.
The market has fallen just over 2.5% from its all-time, which it hit last week, and strong earnings from the market’s largest movers don’t appear to be having any impact.
I think the equity market is ready for a correction, and stocks that have had the largest valuation pushes are going to have the furthest to fall.
Investors are looking for a reason to pull profits off the table, and I think the coronavirus scare is as good a reason as any to do so.
AAPL has more than doubled since the beginning of 2019, but its forward P/E ratio has been stretched even further. Investors are excited about Apple’s service, which has progressively expanded in the high teens to 20% range annually in the past few years. This growing revenue driver will produce a steady, reliable income that doesn’t have the same volatility as the company’s bread and butter, hardware.
Apple’s December quarter results illustrated a big beat on iPhone sales, with the iPhone 11 having more success than expected, but marginally missed on service revenue estimates. AAPL has gained less than 1% since they released earnings after the bell January 28th, and I don’t know how much more this stock’s valuation can be pushed before the market decides to pull back.
This legacy software company has been successful in adapting to customers evolving demands. Its transitioning from on-premise software and services to a cloud-based offering has pushed Microsoft into the trillion-dollar club.
MSFT has rallied 70% since the beginning of last year, and its forward P/E multiple has surged roughly half of that (not the same extent as AAPL’s P/E). I think that Microsoft’s valuation push is a bit more justified than AAPL’s, considering that the company’s topline is driven by reliable subscription services that are expanding quarter-over-quarter.
MSFT shares are trading at their highest P/E valuation in almost 20 years, and a pullback may be imminent. Microsoft’s diverse mix of must-have products & services and its ability to maintain its innovative edge makes this stock an attractive long term play.
Take Away
The markets are trying to decide what to do as Q4 earnings come out strong, but valuation multiples are far from cheap. It may be time for investors and funds to take profits off the table. These big tech names like AAPL and MSFT have stretched valuations, and this may be the cue for people to get out while they are still ahead. The anxiety surrounding the coronavirus appears to be as good a reason as any to lock in gains.
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Can MSFT & AAPL Stretch Their Valuations Any Further?
The US’s two largest publicly traded companies have reported their final 2019 quarterly results, and the markets were impressed. Apple (AAPL - Free Report) and Microsoft’s (MSFT - Free Report) have continued to dominate their fields of operation, impressing analysts and investors alike, despite already elevated expectations. Both of these trillion-dollar companies have driven substantially higher returns than the broader market the past 52-weeks. Now we need to be asking whether these seemingly prolific returns can continue?
Together AAPL and MSFT make up almost 10% of the total S&P 500. These two equities are undoubtedly market movers, but their most recent earnings beats don’t appear to be guiding the markets any higher.
I believe that we are hitting an inflection as investors begin to realize that most of the gains in 2019 were valuation pushes. The S&P 500 has rallied 30% since the beginning of 2019, but its forward P/E multiple has been stretched over 25%.
2019 illustrated relatively modest real growth. Q4’s commerce department GDP report demonstrated that our economy grew only 2.3% in 2019, the slowest growth since 2016. The markets priced in an enormous amount of future growth this past year, and the rich valuations are starting to make investors nervous.
The market has fallen just over 2.5% from its all-time, which it hit last week, and strong earnings from the market’s largest movers don’t appear to be having any impact.
I think the equity market is ready for a correction, and stocks that have had the largest valuation pushes are going to have the furthest to fall.
Investors are looking for a reason to pull profits off the table, and I think the coronavirus scare is as good a reason as any to do so.
Apple (AAPL - Free Report)
AAPL has more than doubled since the beginning of 2019, but its forward P/E ratio has been stretched even further. Investors are excited about Apple’s service, which has progressively expanded in the high teens to 20% range annually in the past few years. This growing revenue driver will produce a steady, reliable income that doesn’t have the same volatility as the company’s bread and butter, hardware.
Apple’s December quarter results illustrated a big beat on iPhone sales, with the iPhone 11 having more success than expected, but marginally missed on service revenue estimates. AAPL has gained less than 1% since they released earnings after the bell January 28th, and I don’t know how much more this stock’s valuation can be pushed before the market decides to pull back.
Microsoft (MSFT - Free Report)
This legacy software company has been successful in adapting to customers evolving demands. Its transitioning from on-premise software and services to a cloud-based offering has pushed Microsoft into the trillion-dollar club.
MSFT has rallied 70% since the beginning of last year, and its forward P/E multiple has surged roughly half of that (not the same extent as AAPL’s P/E). I think that Microsoft’s valuation push is a bit more justified than AAPL’s, considering that the company’s topline is driven by reliable subscription services that are expanding quarter-over-quarter.
MSFT shares are trading at their highest P/E valuation in almost 20 years, and a pullback may be imminent. Microsoft’s diverse mix of must-have products & services and its ability to maintain its innovative edge makes this stock an attractive long term play.
Take Away
The markets are trying to decide what to do as Q4 earnings come out strong, but valuation multiples are far from cheap. It may be time for investors and funds to take profits off the table. These big tech names like AAPL and MSFT have stretched valuations, and this may be the cue for people to get out while they are still ahead. The anxiety surrounding the coronavirus appears to be as good a reason as any to lock in gains.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
See their latest picks free >>