The largest company in the world by market cap, Apple (AAPL) remains a top holding of many investors, for various reasons. For those invested in passive funds such as ETFs, Apple will indirectly end up being the largest holding in most market-cap weighted index ETFs. For active investors, Apple’s long-term capital appreciation growth has frequently turned this behemoth into the largest position organically.

This $2.1 trillion company has built one of the greatest consumer product ecosystems of all time. The company’s “closed” ecosystem and intense customer loyalty provide investors with an impressive moat. Apple has leveraged its growing ecosystem over time to provide consistently growing cash flows that support its valuation. (See Apple stock analysis on TipRanks)

That said, there’s reason to be cautious with Apple right now. The company’s seen some downside momentum materialize of late, and there’s certainly room to speculate that this momentum could continue from here.

Here’s why investors should remain cautious with Apple right now.

Apple’s Valuation Multiples Rising Faster Than Its Earnings

Earnings quality matters to investors. Indeed, today’s overvalued market is filled with companies with questionable earnings growth, from a sustainability standpoint. The fact that Apple is able to provide such consistent growth, given its size, makes the company’s cash flows more valuable to investors on a relative basis.

That said, looking at the company’s valuation multiples relative to its earnings growth, Apple’s share price appreciation is mainly the result of multiple expansion rather than its underlying fundamentals.

A number of recent high-quality pieces of analysis have pointed this out. Indeed, it’s difficult to justify paying twice as much on a relative basis to own stocks right now. Nonetheless, this is the market we’re in.

Accordingly, some have suggested that the entire market has moved toward permanently higher valuation multiples. These multiples are, after all, a function of the risk free rate. With bond yields continuing to hover near-zero, investors are simply willing to accept higher-than-average multiples.

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Others suggest that over time, valuation multiples revert toward their longer-term mean. If this were to happen, Apple would likely have some serious downside from here.

Company Will Need to Continue to Innovate Long-Term

Apple’s success has been tied to the company’s ability to provide consumers with the products, and features, that they want. The range of sectors Apple has completely changed for the better is impressive. Whether referring to the latest iPhone, iPad, or Macbook – many people around the world continue to upgrade each year.

However, the unfortunate reality of the consumer discretionary space is that it’s relatively unforgiving to companies. If consumers don’t see a “need” to purchase that upgrade, sales growth can slow.

This has been the story among Apple bears for years. In spite of that concern, the company seems to have found a way to create products and services its users want consistently. In this context, it can be hard to argue against Apple’s track record.

However, looking forward, there’s reason to be cautious. Investors may start demanding an Apple Car (which has been speculated for some time) or some innovative breakthrough to see the long-term value in holding this company. Other investors have called for more diversified revenue streams (the iPhone still makes up 54% of the company's overall revenues).

Investor fatigue is real, and it’s starting to hit high-flying growth markets. Many investors may benefit from being patient in this environment, even with the largest of companies such as Apple.

What Analysts Are Saying About AAPL Stock

According to TipRanks’ analyst rating consensus, AAPL stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 19 Buy recommendations, 5 Hold recommendations, and 2 Sell recommendations.

As for price targets, the average analyst Apple price target is $157.58. Analyst price targets range from a low of $90.00 per share to a high of $185.00 per share.

Bottom Line

Indeed, Apple’s a stock that has corrected many times over the years by 40% or more. Such a move in the near-term remains unlikely. As long as interest rates stay low and investors have few other options, mega cap names like Apple will be fine.

However, should inflation turn out be structural, or should some sort of macroeconomic event hit the market, Apple’s valuation could require a revaluation.

Right now, it appears there’s not a lot to worry about with Apple stock. It’s down approximately 10% from its all-time high, and many think this is a great discount. Accordingly, investors may once again get their “FOMO” on and hike Apple’s stock price to new all-time highs.

However, there’s always room for patient investors in this market to take advantage of the lack of momentum in a given stock. Today, averaging into an Apple position isn’t a bad idea. If it goes down, one gets to buy more shares at a better price. If it goes up, said investor still gets most of the upside.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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