Apple Inc.'s (NASDAQ:AAPL) Popularity With Investors Under Threat

Apple Inc.'s (NASDAQ:AAPL) price-to-earnings (or "P/E") ratio of 30.2x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Apple as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Apple

Does Apple Have A Relatively High Or Low P/E For Its Industry?

It's plausible that Apple's particularly high P/E ratio could be a result of tendencies within its own industry. The image below shows that the Tech industry as a whole has a P/E ratio similar to the market. So unfortunately this doesn't provide a lot to explain the company's ratio right now. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Tech industry. However, what is happening on the company's own income statement is the most important factor to its P/E.

Want the full picture on analyst estimates for the company? Then our free report on Apple will help you uncover what's on the horizon.

How Is Apple's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Apple's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.1% last year. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.7% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10.0% each year, which is noticeably more attractive.

With this information, we find it concerning that Apple is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Apple's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Apple's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Apple has 3 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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