Shares of Apple crossed the $1 trillion market capitalization mark on Thursday, causing investors to board the tech giant’s titanic boat party to rejoice, but Canadian businessman and “Shark Tank” television personality Kevin O’Leary shouted down the celebration with a warning of a potential iceberg ahead–in particular, the stock’s high price-to-earnings ratio.
Apple is the first publicly-traded U.S. company to break through the $1 trillion market capitalization barrier, but in addition to O’Leary, some investors worry that its current valuation is a precursor to a significant drop ahead. For O’Leary, a decline could rear its ugly head if Apple is unable to sustain innovation of its popular iPhone.
“People ask, ‘Well, why does it trade at a 17.1 P/E,” said O’Leary on CNBC. “Because basically 68% of the revenue of this company is tied to one product–the iPhone and that includes the services business because one problem, this is the bear case on services, is that you need to continue growing the trojan horse–you have to own an iPhone to buy these services because they haven’t really reached out to other services.”
“You don’t have to innovate bleach. You have a brand, you maintain it in the customer’s head, but you have to innovate the phone every year,” O’Leary added.
Apple stock rose as much as 2.9% on Thursday, bringing its year-to date-return to about 22% versus the S&P 500’s gain of 6%. Apple grew its sales by 17% year over year and its earnings by 40% year over year in its June quarter compared to the estimated 8% sales growth rate for the average S&P 500 company.
Other analysts are not so down on the stock, including Wall Street’s “dean of valuation” Aswath Damodaran, who told CNBC Wednesday that Apple is still “reasonably valued” and “not trading at that high a multiple of earnings” at these levels, but O’Leary begs to differ.
“I’m euphoric like everybody else,” said O’Leary. “I love milestones like a trillion dollars–it’s wonderful, but it’s a phone–no different from a Nokia or a Blackberry or a Sony device that played music decades ago, and it’s really hard to stare at those case examples and ignore them.”
For more market trends, visit ETFTrends.com.