Apple Stock: Teaching a Lesson on ‘Farmistering’ (NASDAQ:AAPL)

Apple Stock: Teaching a Lesson on ‘Farmistering’ (NASDAQ:AAPL)

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Thesis

Earlier I argued that it is unlikely that Apple Inc. (NASDAQ:AAPL) fiscal fourth quarter results would disappoint. And in fact they didn’t. Despite the excessive “alarmism” around the demand for the iPhone 14 – see here, hereY here – Tim Cook said that “We are still limited today, so we are working very hard to meet demand.”

That said, Apple beat analyst consensus on both revenue and profit; and the company proved once again that doubting the world’s most valuable consumer company is foolish.

Reflecting on another strong quarter from Apple, while Google (GOOG, GOOGLE), Metaplatforms (GOAL) and Amazon (AMZN) stumbled, I reiterate my “Buy” recommendation on AAPL stock. But, based on higher risk premiums for Big Tech in general, and smaller EPS adjustments for Apple specifically, I lower my base case target price to $200.59.

Apple September Quarter

From July to end of september, Apple generated record revenue of $90.14 billion, an increase of 8% compared to the same period a year ago. For reference, analyst consensus had estimated fourth-quarter sales at about $88.8 billion ($1.37 billion).

The strong sales figure was fueled by better-than-expected iPhone sales, up 10% year-over-year to $42.6 billion (representing about 47% of sales), as well as exceptionally strong (record) demand for Mac. Interestingly, strong demand for the Mac continued while Gartner Estimate PC shipments have fallen 19.5% in the September quarter. Services also posted record revenue, with the segment rising to $19.2 billion and claiming more than 900 million paid subscriptions.

Tim Cook, CEO of Apple commented (emphasis added):

This quarter’s results reflect Apple’s commitment to our customers, to the pursuit of innovation, and to leaving the world better than we found it…

… What we head into the holiday season with our most powerful lineup yet, we lead with our values ​​in every action we take and every decision we make. We are deeply committed to protecting the environment, protecting user privacy, strengthening accessibility, and creating products and services that can unlock the full creative potential of humanity.

But Luca Maestri, Apple’s chief financial officer, also accepted in the analyst call that (emphasis added):

we believe that the total company year after year revenue performance will slow during the December quarter compared to September quarter

Apple Q4 2022 Results

Apple Q4 2022 Results

Profitability expands

Apple’s profitability remained surprisingly strong. During the September quarter, the company generated operating income of $24.89 billion, compared to $23.79 billion in the same period a year ago. Net income increased to $20.72 billion (versus $20.55 billion in the fourth quarter of 2021).

Notably, Apple was the only “Big Tech” player to manage to increase EPS in the September quarter. The company generated EPS of $1.29, up 4 percent year over year, while from amazon net profit fell 9 percent, by microsoft down 14 percent of the alphabet decreased 27 percent, and Goals fell 52 percent.

This alone should clearly underline Apple’s business quality.

Apple Q4 2022 Results

Apple Q4 2022 Results

Shareholder returns

During the September quarter, Apple returned more than $29 billion to shareholders, in the form of dividends and share buybacks. If such a number were assumed for the next four quarters, which is not unlikely given Apple’s strong cash flow and balance sheet, Apple’s yield would be closer to 5%, higher than what Treasury yields offer to 10 years, while offering exposure to growth opportunities. .

With the fourth quarter of 2022, Apple has also declared a cash dividend of $0.23 per share, to be paid on November 10.

Valuation Update

I have previously valued Apple at $247.51/share, and I still believe that, in the long run, such an assessment would make sense. I continue to see the following (potential) value drivers: 1. New market opportunities including VR/AR and Apple Car; 2. Accelerating force in Apple’s portfolio of services; and 3. Continuous financial engineering. However, I must also acknowledge that Big Tech valuations are falling and other companies, particularly Meta and Google, provide high value opportunities, in my opinion.

That said, I understand that a 7.5% cost of capital probably does not reflect an adequate return requirement, and I update this figure to 8.25%. Additionally, I slightly adjusted my EPS estimates to reflect analyst consensus adjustments. However, I am still stuck at a terminal growth rate of 4.5%.

Given the EPS updates as highlighted below, I now calculate a fair implied share price of $200.59.

apple valuation

Analyst’s EPS estimates; Author’s calculation

Below is also the updated sensitivity table.

Apple Valuation Sensitivity Table

Analyst’s EPS estimates; Author’s calculation

conclusion

Following Bloomberg’s report that Apple is apparently cutting production of the iPhone 14 product line, investors were wary that Apple’s fourth-quarter results were disappointing. But while other big tech companies collapsed after reporting their September quarter, Apple was up slightly after Q4 figures (+0.5% benchmark after-hours trading).

However, it’s also impossible to ignore that Apple stock remains closely correlated to the S&P 500 (TO SPY). Consequently, if an investor expects more pain for the S&P 500, it will be difficult to argue that Apple will not suffer at the same time.

AAPL vs. SPX

looking for alpha

Reflecting on another strong quarter for Apple, I am confident in reiterating my “Buy” rating on APPL stock. However, based on higher risk premiums for Big Tech in general and smaller EPS adjustments for Apple specifically, I lower my base-case target price to $200.59 (vs. $271.51 per share previously).

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