WSJ’s Gallagher warning to Apple investors

Tech giant Apple Inc. (NASDAQ: AAPL) is now valued by investors at more than $2 trillion and comes at a time when its App Store business is under attack, according to The Wall Street Journal’s Dan Gallagher

Run to $2 trillion

Apple’s stock gained an average of 3.5% each week since the start of June as investors didn’t view the company’s operations as vulnerable to the COVID-19 pandemic, Gallagher wrote. But the reality may be different as more than 80% of total revenue is generated from high-price electronic devices made almost exclusive in China.

Nevertheless, few investors can argue that at a $2 trillion valuation, the market is affording Apple zero room for error or missteps. The math behind the $2 trillion figure assumes the stock is trading at more than 32 times forward earnings (31 times excluding $81 billion in net cash). This happens to be the highest multiple seen in more than 10 years.

Back when Apple’s stock first hit the $1 trillion valuation milestone, it was trading at around 15 times forward earnings. Yet since then, the company’s earnings outlook certainly hasn’t grown enough to warrant such a multiple expansion.

Stock is clearly ‘more risky’

Apple is facing a very public and vocal lawsuit involving its App Store business. The company is facing a legal battle with Fortnite maker Epic Games who is trying to draw attention to Apple’s practice of collecting 30% of all in-app purchases.

While it is unclear what the outcome of the lawsuit will be, it could pose a risk to the Services business that has become increasingly part of the bullish narrative over the past few years. Investors are willing to give Apple a pass if iPhone and other device sales slow down on the condition that users are spending more money on the App Store that boasts much higher margins.

Meanwhile, part of Apple’s $2 trillion valuation assumes the iPhone maker releases a 5G phone in the coming months. Investors have come to expect like clockwork a new device every September and a pandemic isn’t considered a valid excuse at these levels.

Even if Apple launches a 5G phone, it will come with its own sets of challenges, Gallagher further explained on CNBC’s “Power Lunch.” These devices are a lot more expensive than the 4G cycle and the outlook for consumer spending and confidence is at best unclear. Also, 5G coverage is still in its very early stages which questions why many people would want to even buy a device that won’t necessarily work everywhere.

As such, the 5G catalyst for Apple and other companies may even be “overrated,” Gallagher concluded.