Shares of the Cupertino company have been down 9% year-to-date and 15% from the late January all-time high. The stock of the electric vehicle maker has corrected even more: 12% in 2021 and a whopping 30% from the peak.
Without having the ability to look into a crystal ball and tell what will happen to these tech stocks in the future, the Apple Maven tries to answer the question from two angles: valuation and catalysts.
Valuations: not a bargain
Apple stock currently trades at a current-year earnings ratio (also known as P/E) of about 28 times. This is about four turns below the peak 2021 valuation multiple, reached a mere two months ago.
However, rarely in history has Apple traded at such rich multiples, even after the modest decline in the first quarter. To be clear, an argument can be made for why Apple now deserves a higher valuation multiple, including:
- More aggressive multi-year growth expectations in iPhone sales through the 5G supercycle;
- Heavier revenue mix of more stable, higher margin service segment;
- The rebirth of two product categories believed to be in secular decline: the Mac and iPad;
- Short term interest rates near zero, which justifies more aggressive bets in risk assets.
In the case of Tesla stock, valuations look even richer. The 2021 P/E has decreased quite a bit from a top of over 250 times, at the end of last year. Still, at nearly 150 times, few can reasonably claim Tesla’s to be a low current-year earnings multiple.
Here is a fun fact: the electric car giant sells only about 500,000 vehicle per year, while GM sold 13 times this many in 2020. Yet, Tesla’s equity is valued at over half a trillion dollars, seven times more than GM’s market cap.
The problem is that quantifying the investment opportunity in Tesla through the conventional methods makes little sense. To understand how Tesla’s value might be reasonable (and, who knows, even understated), one must look much farther into the future.
This is exactly what Cathie Woods’ ARK Invest has done. The firm thinks that (TSLA) can reach its price target of $3,000 within 5 years, for an upside opportunity of 400%. The catch, however, is that ARK has to look at 2025 projected earnings. Only then can the firm apply a much more reasonable EV/EBITDA (another common valuation metric) of 16 times, compared to today’s aggressive 64 times multiple, to justify its bullish call.
Catalysts: plenty on both sides
Valuation alone is not enough to determine which stock is a better buy-on-weakness play. In fact, catalysts are often the most important factor in moving stock prices in the short-to-medium terms.
The Cupertino company’s stock price could benefit from several bullish developments in the foreseeable future:
But when it comes to catalysts, Tesla probably shines brighter than Apple. Back to ARK’s investment thesis, even the firm’s more bearish case (let alone the bullish one) assumes that CEO Elon Musk’s company is staring at several key catalysts that could send the stock much higher:
- A highly anticipated, rapid increase in electric car market share (relative to combustion engine vehicles) leading to substantially higher EV revenues;
- The launch of a ride-hail service business – either human-driven or, much better, autonomous;
- The expansion of Tesla’s insurance business, possibly at better-than-industry margins, due to the detailed driving data that the company collects.
It is hard to pin down the best buy-on-dip opportunity between Apple and Tesla stock, since the future is so uncertain. But in my view, Apple probably makes for a more conservative play due to more de-risked valuations and less aggressive growth profile. Tesla seems to be the higher risk, higher reward alternative for investors looking for a “higher octane” investment opportunity.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)