Buying Apple stock? Think twice

FORTUNE -- Is there anything Apple can't do? Nine years ago it rescued the music business with the iPod and iTunes. The iPhone (60 million sold and counting) transformed the cellphone business, and the iPad looks like another blockbuster. The company's design aesthetic permeates consumer products these days, and a growing cult of worshippers (including this magazine at times) treats CEO Steve Jobs as a deity. Apple is simply the most influential company in the world today.

Investors are equally captivated. Apple's (AAPL, Fortune 500) stock has soared 428% in the past five years as profits have risen at an astounding 59% annual rate. That growth makes Apple the planet's third-most-valuable company by market capitalization, trailing only Exxon Mobil (XOM, Fortune 500) and PetroChina (PTR), even as its sales amount to less than one-sixth of those of the oil behemoths. Wall Street sees more sunny days ahead: 47 of 50 analysts covering Apple rate it a buy.

What do universal adulation, a soaring stock price, and near-unanimous Wall Street support add up to? A certain bestubbled, black turtleneck-wearing chieftain in Cupertino, Calif., may smite us for saying so, but perhaps it's time to raise a blasphemous notion: Now is not a good time to buy Apple stock.

At first glance the shares seem cheap for a tech company with torrid sales. Apple's stock trades at 18 times trailing 12-month earnings, a little higher than the S&P 500 index (SPX), which comes in at 14. And Apple is priced at 17 times analysts' earnings estimates for next year, vs. 13 for the S&P 500. "It's growing like a fleet-footed startup," says Yair Reiner, an Oppenheimer analyst whose Apple forecasts are the most reliable among Wall Street analysts. But, he says, "it's being valued as just another bellowing steer in the S&P 500." Reiner thinks shares, currently trading near $240, could hit $330.

Apple's price/earnings ratio is modest because the company's earnings growth has been outlandishly good. This year analysts expect Apple's profits to rise by 63%, after jumping 35% in 2009, 75% in 2008, and 76% in 2007. In 2011 profits are predicted to climb another $3 billion, or 22%, to $16.5 billion. The iPhone is still on fire. And the new iPad sold a whopping 3.3 million units in its first quarter on the market.

But there's the rub. Apple's stock price is built on the expectation that sales will continue to rocket. What if one of its handful of cash cows plateaus? What if a new product fails? (It may be hard to recall right now, but that has happened.) Can Apple then sustain a five-year annual sales growth rate of 35%? Can it continue to increase cash flow a stunning 65% a year?

"Basically what we're seeing is that Steve Jobs has to continue to find the perfect way to position a product that will command worldwide attention," says Joel Achramowicz, an analyst at Blaylock Robert Van and one of the small minority who rates Apple stock a hold. "Can we really expect his small team to do that time and time again? I don't think he can." If Apple had a monopoly, as Microsoft (MSFT, Fortune 500) did in days of yore, Achramowicz says, Apple's earnings would be protected. But "Apple's model is very brittle -- it's strictly consumer-based," he argues. "As we've seen with the latest iPhone antenna problem, one small mistake and the whole house of cards can go to heck."

It may not be a mistake that causes trouble. The recession proved that Apple isn't immune to a lousy economy. In 2009 its earnings growth dropped to 35% from 75% in 2008. The lesson: Some people will buy iPhones and Macs in any economy, but some won't. Today a double-dip recession remains a possibility, and that could depress the company's sales. But Apple's stock price doesn't reflect that.

Then there's the law of large numbers. "It is easy to keep a high growth rate when you start from a low base, but to double at the level of Apple's current business status is pretty tough," notes Vitali Kalesnik, head of analytics at Research Affiliates, whose investment strategies are used to manage some $50 billion. The Newport Beach, Calif., firm devises stock indexes weighted by fundamental measures instead of market cap, a methodology that has produced higher returns than traditional indexes.

By those measures, Apple appears overvalued. Apple ranks 65th out of 1,000 U.S. companies, according to Research Affiliates, which factors in five-year average sales, cash flows, book value, and dividends (which are excluded if the company, like Apple, doesn't pay any). The difference between Apple's No. 2 U.S. market cap and its No. 65 fundamental weighting indicates that the market could be overvaluing Apple. Kalesnik notes that Apple's sales and cash flow have to nearly double to match those of lesser-valued tech titans Microsoft and IBM (IBM, Fortune 500) to make Apple fairly priced relative to those companies. "Stay away from Apple if you prefer not to gamble with unfavorable odds," he says.

Al Ehrbar, president of consultancy EVA Advisers (and a onetime Fortune staffer), reaches a similar conclusion using a different methodology. His firm uses the metric known as "economic value added," which gauges the profitability a company is creating. In the past five years Apple added an astounding average of $1.7 billion a year in EVA, compared with declines for the average U.S. company with sales above $1 billion. Apple's figure was more than 2½ times what investors were expecting.

In the next 10 years investors anticipate Apple will add EVA of $1.4 billion a year. That would place Apple among the 20 or 30 top performers in the U.S. over the next decade. If it can't maintain its hot streak, the stock will suffer. That makes Apple a hold, according to EVA Advisers, compared with other technology companies.

There are hints that investors may already be tempering their enthusiasm: After dramatically outpacing the S&P 500 early in the year, Apple shares have declined 11% since mid-June, as the S&P fell 6%. During that time Apple shares have traded between $274 and $240. The stock moved in a similar sideways pattern in 2007 and 2008 before large sell-offs, though the economic collapse and Steve Jobs' health played roles in those declines.

So forgive us, Steve. Apple is a great company and shows every sign of remaining that way. But the company's underdog days are behind it, and now it faces a nemesis that can paralyze any stock: the tyranny of high expectations.

An earlier version of this story incorrectly stated that EVA Advisers developed the economic value added metric. In fact, EVA Advisers licenses the methodology from consultancy Stern Stewart & Co., which invented EVA.